The term viatical settlement refers to a person with cancer or other life-threatening disease selling his or her life insurance policy in exchange for immediate cash. The person selling the policy can then use the proceeds to pay for medical treatments, living expenses, or any other costs they may have. This type of transaction can provide a large amount of financial relief to individuals with a serious illness. However, as with all large transactions, it’s important to know the answers to key viatical settlement taxation questions before proceeding.

Who is Eligible for a Viatical Settlement?

There are a few criteria you must meet in order to qualify for a viatical settlement. You must have a life-threatening disease such as cancer, ALS, or Alzheimer’s to be eligible to sell your life insurance policy. Additionally, it must hold a value of at least $100,000, and you need to be a legal resident of the United States. Some viatical companies have additional qualifications but these are the basic qualifiers.

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Tax Benefits

Viatical Settlement Taxation Implications

The legal definition of a viatical settlement refers to when an individual with a life expectancy of 24 months or less sells their policy to a third-party for immediate funds. The law deems that individuals that fall within this projected life expectancy, should not be burdened with additional taxes when completing a viatical. Therefore, if a doctor or the actuary firm used by the viatical company you’re working with deem that you have a life expectancy of 24 months or less, the entire settlement is free from any taxation.

Even if the insured lives past their projected life expectancy of 24 months or less, the proceeds from the settlement are still completely tax-free.

Viatical Settlements and Estate Taxes

In most situations, all property that a person owns at the time of his or her death becomes part of an estate subject to taxation. This includes life insurance policies.

However, viatical settlement taxation is different because it involves no gifting or estate planning. Therefore, the face value of the life insurance policy involved in the viatical settlement is not included in the overall taxation value of the estate even when the sale occurs shortly before death. However, the proceeds from the sale may be included in the taxable estate if not spent, given away, or disposed of in another manner prior to the insured’s death.

Keep in mind, these are basic guidelines for how taxation may affect your settlement. If you have more questions in regards to viatical taxation, make sure to consult a specialist in this area such as your tax advisor for additional information.

American Life Fund has worked with hundreds of cancer patients to help them achieve financial freedom. To find out if your policy is eligible for a viatical settlement, complete our simple form. Or, if you would like to learn more about how American Life Fund can assist with your financial needs, give us a call at 877-226-9836. We look forward to working with you!

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