Who Is Considered the Viator in a Viatical Settlement?

Viatical settlements represent a financial arrangement allowing individuals to convert their life insurance policies into immediate cash. This process involves the sale of an existing policy to a third party, providing a lump sum payment that can be used to address pressing financial needs.

Understanding Viatical Settlements

This payment is typically greater than the policy’s cash surrender value but less than its full death benefit. The primary reason individuals consider these settlements is often a pressing need for immediate funds, perhaps due to significant medical expenses or a desire to improve their quality of life during a challenging period.

Unlike a typical life settlement, which generally applies to individuals with a longer life expectancy, a viatical settlement is specifically for those facing a severe health condition. The defining characteristic of a viatical settlement is that the insured individual typically has a life expectancy of two years or less. This distinction is important because it influences the valuation of the policy and the specific regulations that apply to the transaction.

Defining the Viator

The viator is the central figure in a viatical settlement, defined as the owner of a life insurance policy who sells or assigns their policy to a third party. This individual is simultaneously the policyholder and the insured person whose life is covered by the policy being sold.

A viator is typically someone who has been certified by a licensed physician as terminally ill, often with a life expectancy of 24 months or less. Alternatively, a viator may be chronically ill, meaning they are unable to perform at least two activities of daily living, such as bathing or eating, or require substantial supervision due to severe cognitive impairment.

For the viator, the tax implications of a viatical settlement are a significant consideration. Generally, if the viator is terminally ill and meets specific Internal Revenue Service (IRS) requirements, the proceeds from the settlement are considered an advance on the life insurance death benefit and are tax-free. This tax-exempt status applies as long as the transaction is conducted through a qualified viatical settlement provider and the policyholder is an individual.

For a chronically ill viator, the proceeds are tax-free only to the extent they are used to cover qualified long-term care expenses not reimbursed by other insurance or Medicaid. Any portion of the proceeds exceeding these medical costs may be subject to taxation. If a policyholder is terminally ill but has a life expectancy exceeding two years, the settlement might be taxable, with parts potentially treated as capital gains or ordinary income.

Other Key Parties and Their Roles

The viatical settlement provider is the company or entity that purchases the life insurance policy from the viator. This provider furnishes the lump sum payment to the viator and subsequently assumes responsibility for all future premium payments on the policy. Upon the death of the insured, the provider, as the new policy owner and beneficiary, receives the full death benefit.

A viatical settlement broker acts as an intermediary, representing the viator in the transaction. Their role involves assisting the viator in finding a suitable provider and negotiating the terms of the settlement to ensure the viator receives the most favorable offer for their policy.

Investors are the ultimate funders who provide the capital for these transactions. They often purchase policies from viatical settlement providers, taking on the responsibility of future premium payments and eventually receiving the death benefit when the insured passes away. The investor’s return depends on the actual lifespan of the insured, as a shorter life expectancy generally leads to a quicker and potentially higher return on their investment.