How Much Is Normally Paid in a Viatical Settlement?

A viatical settlement provides a financial option for individuals facing a life-threatening or chronic illness. It involves the sale of a life insurance policy by the policyowner to a third-party buyer. In this transaction, the policyowner receives a lump-sum cash payment, which can be used for medical expenses, living costs, or to alleviate financial pressure.

Key Factors Influencing Payout

The amount a policyowner can receive from a viatical settlement is determined by several factors. The policy’s death benefit serves as the initial benchmark for valuation, with larger policies generally leading to higher settlement offers. The insured’s health status and life expectancy are influential factors. A shorter estimated life expectancy results in a higher percentage payout. This occurs because the investor anticipates receiving the death benefit sooner, reducing the period over which they must pay premiums.

The type of life insurance policy also plays a role in its value. Permanent life insurance policies often have accumulated cash values that can contribute to a higher overall payout. Future premium obligations remaining on the policy will directly reduce the net value for the buyer. Policies that include a “waiver of premium” feature may yield a higher offer due to reduced future costs for the buyer.

Economic conditions, including interest rates and market demand from investors, also influence the pricing of viatical settlements. These factors can impact how much an investor is willing to pay for a policy.

Typical Payout Percentages

The cash amount received in a viatical settlement is typically expressed as a percentage of the life insurance policy’s death benefit. Payouts commonly range from 20% to 70% of the policy’s face value. However, some cases, particularly those involving a very short life expectancy, can see payouts reach up to 80% or even higher.

The specific percentage offered within this range is largely dictated by the combination of factors previously mentioned, with the insured’s life expectancy being a particularly strong determinant. A shorter life expectancy generally correlates with a higher percentage payout, as the buyer anticipates a quicker return on their investment. The exact amount offered to a policyowner is often the result of a competitive bidding process among various licensed viatical settlement providers. This competition helps ensure that policyowners receive a fair market value for their policy based on its unique characteristics and the insured’s health condition.

Tax Implications of the Payout

The tax treatment of proceeds from a viatical settlement is a significant consideration for policyowners. Under federal law, specifically the Health Insurance Portability and Accountability Act (HIPAA) of 1996, viatical settlement proceeds are generally considered tax-free. This tax-exempt status applies when the policyowner is certified as either terminally ill or chronically ill, as the payment is viewed as an advance of the life insurance benefit.

For individuals certified as terminally ill, meaning they have a life expectancy of 24 months or less, the entire amount received from a qualified viatical settlement is typically excluded from federal income tax. There is no federal limit on the tax-free amount for terminally ill individuals. Chronically ill individuals may also receive tax-free proceeds, but this is generally limited to amounts used to cover qualified long-term care expenses not reimbursed by other insurance. A chronically ill individual is typically defined as someone certified by a licensed health professional as unable to perform at least two activities of daily living for at least 90 days, or requiring substantial supervision due to severe cognitive impairment.

If an individual is neither terminally nor chronically ill, the sale of a life insurance policy is generally considered a “life settlement,” and the tax treatment differs. In such cases, the proceeds are typically taxable to the extent they exceed the policyowner’s cost basis, which is the total amount of premiums paid into the policy. Any gain up to the policy’s cash surrender value may be taxed as ordinary income, while any remaining gain could be subject to capital gains tax. To ensure the tax-free status for terminally or chronically ill individuals, the purchaser of the policy must be a qualified viatical settlement provider recognized by the Internal Revenue Service (IRS) and appropriately licensed in the state where the insured resides. Given the complexities of tax laws, consulting a qualified tax professional is always recommended to understand specific implications based on individual circumstances.