Viatical Settlements vs. Life Settlements: Key Differences You Should Know

The dilemma many life insurance policyholders are in is whether to keep paying premiums in order to stay covered or to investigate other alternatives in order to gain the value of their policy. There are two common alternatives to selling life insurance policies, viatical settlements and life settlements, but they apply to quite different groups of people and have different benefits and drawbacks. These differences are important to be understood in order to make an informed decision regarding your future finances.

Knowing the Health Status Requirement

The most inherent distinction between viatical settlements and life settlements is the health condition of the policyholder. Viatical settlements are also specific to people with terminal or chronic illnesses, whereas life settlements are very specific to the healthier seniors who are no longer in need or can afford their insurance. The American Life Fund site explains viatical settlement meaning and how it offers instant financial assistance to individuals who are living with conditions that are life-threatening like cancer, ALS, Alzheimer and COPD. Viatical settlements provide any person with or without age to get cash during a medical crisis. By contrast, life settlements usually necessitate the policyholder to be aged 65 years, although exceptions exist whereby younger people who have severe health conditions can also qualify.

Payout Differences and Tax Implications

Viatical settlements also pay much more than life settlements, which can be as high as 50% to 70% of the face value of the policy. In comparison, life settlements usually pay between 20% and 50% of the death benefit. This is a big disparity since the buyers will pay less premiums before the death benefit is paid out by a terminally-ill person than that of a healthy elder.

There is also a big difference in tax treatment of these two choices. When the insured is terminally or chronically ill, the viatical settlement proceeds are usually tax free under the federal law and therefore the entire amount can be utilized immediately. Life settlement proceeds, however, are taxable as federal income and should be reported in the tax return as income. Viatical settlements are especially appealing to those who require the greatest amount of money in case of health emergencies due to this tax advantage.

Life Expectancy and Timeline Factors

The other important difference is the life expectancy. The patients who apply to viatical settlements usually have a life span of 24 months or less because of diagnosed terminal or chronic diseases. Life settlements would entail the older population with a long life span, up to 10 to 15 years or more. The viatical settlements will have a shorter timeline which means that the pay outs will be high since the buyers will be making premium payments over a shorter period.

Policy Value Requirements and Eligibility

Both of these types of settlements need minimum face value policies which usually begin at $100,000, although viatical settlements occasionally accept policies as low as $100,000 and life settlements as high as policies. Both possibilities demand that the policies should be at least two years old. Viatical settlements are more available since they do not have any age restriction and are able to cover a variety of policies including convertible term life insurance. Life settlements are mostly centered on the whole life and universal life policies of seniors.

Which Option is Right for You?

Whether to take viatical or life settlements is a matter of choice which is solely based on your situation. When you have a terminal illness and need a large sum of money to cover medical bills, living expenses or to satisfy quality-of-life needs, a viatical settlement can provide you with quick access to large sums of money with no tax liability. In case you are a healthy older adult, just wishing to leave a life insurance policy that you no longer require, a life settlement offers a fair amount of money and frees you of any premium payments.

Conclusion

Although viatical settlements and life settlements are similar, they offer solutions to various financial requirements at different stages of life. Viatical settlements are a quick fix to those who are fighting severe diseases and they are higher paying with tax-free benefits. Life settlements are used by healthy elderly individuals who are interested in selling policies that they do not require. Awareness of these major distinctions will enable you to select the option that will suit best in terms of your health condition, financial requirements, and the long-term objectives. To get a clear understanding of which type of settlement suits best in your unique case, it can be helpful to consult with a financial advisor.