What Is the Difference Between a Viatical and a Life Settlement?

What Is the Difference Between a Viatical and a Life Settlement?

A life insurance policy is important. When you’re young and earning money for your family, your death could destroy everything for those you love. Your passing might not only leave your family hurt and in mourning; it could also mess up their finances as they deal with your lost income and the high costs of death-related essentials such as burials or cremations. A life insurance policy ensures that your beneficiaries will get funds to make up for these losses, making life a little easier at a difficult time.

But as you grow older and save carefully, a life insurance payout starts to look a lot less essential. Meanwhile, other expenses may be building up fast. That can be a recipe for disaster — unless the life insurance payout can be converted into cash in hand now. Happily, it often can be. You have two ways to do that: a viatical settlement and a life settlement. They’re quite similar, but not identical.

The difference between a viatical settlement and a life settlement

Both viatical settlements and life settlements are ways to sell an existing life insurance policy in exchange for cash. So what makes them different?

The difference between these two settlements has to do with the health and life expectancy of the person selling the life insurance policy. If the life expectancy is relatively short, then the deal can be a viatical settlement; if not, then it’s a life settlement.

This matters at tax time so you definitely want to check with a tax calculator. Uncle Sam will take a cut of a life settlement, but viatical settlement funds are tax-exempt because they’re considered to be a type of aid to a terminally ill person. Medical bills are a huge problem in our country (and it’s not only for older people), so this exemption makes sense.

It’s not enough to just prefer a viatical settlement, of course. The aforementioned differences in health and life expectancy aren’t just guidelines — they’re rules. You’ll need to have a life expectancy of less than 24 months and will need to be either chronically or terminally ill to qualify for a viatical settlement. Without that, you could still look into a life settlement.

When the difference matters — and when it doesn’t

Clearly, the difference between a viatical settlement and a life settlement is  important. It’s possible to choose to sell your life insurance and then find that you’re not eligible for a viatical settlement. Plus, you get major savings at tax time for those who have a viatical settlement instead of a life settlement. The difference does matter.

Yet, in another sense, the difference doesn’t matter all that much — at least, not to you. You probably don’t know all that many individuals and organizations looking to invest in life insurance policies. Getting a viatical settlement or a life settlement set up is not something you’ll do on your own, at least not in most cases. The best option is usually to turn to a broker who specializes in these sorts of agreements and transactions.

And if you’re going to a broker, then you’re relying on an expert to take care of all of the details for you. Your broker will, of course, know the difference between a life settlement and a viatical settlement and will use that information to get you the best deal for which you’re eligible. But you, personally, won’t need to worry about the distinction.

So rely on the pros. Talk to a financial adviser about your options for selling your life insurance, and then rely on a broker to land the right deal for you.