A Viatical Settlement is a powerful financial option that allows individuals with a terminal or chronic illness—typically with a life expectancy of 24 months or less—to sell their life insurance policy for a lump sum cash payout. This approach provides immediate access to funds that can be used for medical expenses, long-term care, debt reduction, or simply to improve quality of life during a difficult time.

Unlike surrendering a policy or letting it lapse, a viatical settlement unlocks significantly more value, allowing policyholders to benefit from their coverage while they are still alive. In most cases, the proceeds from a viatical settlement are entirely income tax-free under IRS guidelines, as they are considered an advance on the death benefit for qualifying individuals. This tax exemption ensures that the funds received can be used in full, without being diminished by tax liabilities—an essential advantage when facing urgent financial needs.

Key Benefits:

  • Immediate cash access for pressing medical or personal expenses

  • Tax-free payouts under federal law (for qualifying individuals)

  • No future premium obligations—the buyer takes over the policy

  • Freedom to use the money however needed, including for alternative treatments, travel, or legacy gifts

Viatical Settlement Taxes: Smiling older woman patient and young doctor reading insurance contract

HOW ARE VIATICAL SETTLEMENTS TAXED?

A viatical settlement can offer a powerful financial solution during one of life’s most difficult times—without the burden of taxes. These settlements allow individuals facing a terminal or chronic illness to sell their life insurance policy in exchange for an immediate cash payout. Under most circumstances, the proceeds from a viatical settlement are tax-exempt, giving policyholders access to critical funds without additional tax liabilities.

Why Viatical Settlements Are Tax-Free

Under IRS guidelines, viatical settlements are treated as an advance on life insurance benefits, which are generally not subject to income tax. This exemption is especially meaningful for individuals facing a life expectancy of 24 months or less, as it enables them to use their policy’s value to cover medical expenses, debt, or personal needs without sacrificing part of the payout to taxes.

However, specific conditions must be met for the proceeds to remain tax-free:

For the Policyholder:

  • The policyholder must be certified by a licensed physician as either terminally ill—meaning they have a life expectancy of 24 months or less—or chronically ill.

  • To qualify as terminally ill, a physician must issue a written certification stating that the individual’s life expectancy is no more than 24 months due to illness or injury.
    Alternatively, to be considered chronically ill, the individual must be unable to perform at least two activities of daily living (ADLs)—such as bathing, dressing, eating, toileting, transferring, or continence—for a period of at least 90 days, or require substantial supervision due to cognitive impairment.
    This certification must be current, documented, and provided by a licensed healthcare professional, and it serves as the basis for determining tax-exempt eligibility under viatical settlement guidelines.

For the Buyer (Settlement Provider):

  • Must be a qualified viatical settlement provider, typically licensed and regulated under state law.

  • Must meet IRS criteria for purchasing policies in a viatical settlement context.

Meeting both sets of conditions ensures that the settlement remains exempt from federal income tax.

State vs. Federal Tax Considerations

While federal law provides the foundation for the tax-exempt status of viatical settlements—particularly for terminally or chronically ill individuals—state tax laws can differ widely, influencing the final tax implications of a settlement. For example, residents of Florida, the state does not impose a personal income tax. This means that viatical settlement proceeds received by Florida residents are generally not subject to any additional state income taxation, offering a clearer path to maximizing the financial relief these settlements are meant to provide.

However, it’s important to recognize that:

  • State laws can change annually. Even though Florida’s tax environment is currently favorable, legislative changes could introduce new rules or requirements that may affect future transactions.

  • Multi-state financial ties may complicate matters. If a policyholder owns real estate, maintains financial accounts, or has other assets in states outside of Florida, those jurisdictions may have their own tax rules that could come into play.

  • Estate and Medicaid considerations may apply. Large viatical settlement proceeds can affect eligibility for Medicaid or other public assistance programs. They may also be subject to estate planning implications, especially if the funds are passed on to heirs or impact the value of the individual’s estate.

For these reasons, it’s highly recommended that individuals consult a qualified tax advisor or estate planning attorney. These professionals can help you navigate the intersection of federal and state tax laws, avoid unintended consequences, and ensure you retain the maximum value from your settlement while staying in full compliance with applicable regulations.

Why Consulting a Tax Advisor Is Essential

While viatical settlements are generally tax-free, each case is unique. Variables such as:

  • The type of life insurance policy

  • The structure of the transaction

  • The entities involved

  • Any previous cash value withdrawals from the policy

…can all influence the final tax outcome.

That’s why it’s strongly recommended to consult with a qualified tax advisor or financial planner who is familiar with both IRS regulations and state-specific considerations. They can help:

  • Confirm eligibility for the tax exemption

  • Avoid unintended financial complications

  • Ensure full compliance with state and federal laws

How Summit Life Settlements Supports You

At Summit Life Settlements, we prioritize both your financial return and peace of mind. Our experienced team works with terminally and chronically ill clients across the country to:

  • Secure the highest possible offers through competitive bidding

  • Partner only with licensed viatical settlement providers

  • Ensure tax-exempt treatment whenever possible

  • Coordinate with your legal or financial advisors for a seamless experience

If you’re exploring a viatical settlement, Summit can help you maximize your policy’s value while ensuring you stay fully compliant with all tax regulations.

INELIGIBILITY FOR A TAX-FREE VIATICAL SETTLEMENT

Some viatical settlement scenarios don’t meet IRS requirements and are taxable. Being informed about these scenarios helps avoid unexpected tax liabilities. For example:

  1. If a chronically ill person uses the proceeds for non-healthcare expenses like personal investments or luxury purchases, the settlement isn’t tax-free.
  2. If someone with a terminal illness has an expected lifespan over 24 months, they don’t meet IRS criteria for a tax-free viatical settlement. They might consider a life settlement instead, although these proceeds are partially taxable and may offer less financial relief.
  3. If a terminally ill person sells their policy and later finds the buyer isn’t recognized by the IRS as a valid provider, the transaction isn’t tax-free, leading to potential tax liabilities.

If you don’t qualify for a tax-free viatical settlement, you might get a traditional life settlement and be taxed accordingly:

  1. Proceeds up to the amount of total premiums paid aren’t taxable.
  2. If proceeds exceed total premiums paid, the policy’s cash surrender value minus the premiums paid is taxed as ordinary income.
  3. Remaining proceeds are taxed as capital gains, usually at a lower rate than ordinary income.

Be aware that surrendering a policy for cash before death or borrowing from its cash value reduces viatical settlement proceeds, impacting financial benefits and planning. Consider all options and consequences carefully. While viatical settlements can provide financial relief for the terminally or chronically ill, seek professional advice and understand tax implications before proceeding. Consulting a financial advisor, tax professional, or attorney helps make informed decisions. Understanding a viatical settlement’s nuances and potential outcomes helps protect your financial interests in challenging times.

KEY INSIGHTS ON VIATICAL SETTLEMENT TAXES

Understanding viatical settlement tax implications can help you decide if it’s the best option for you. Here are four key points about viatical settlement taxation:

  1. While viatical settlements are usually not taxed, specific details can have federal or state tax consequences. It’s vital to know the rules in your state and to ensure compliance with tax laws.
  2. Check if your state requires viatical settlement providers to be licensed. If not, providers must still follow the NAIC’s Viatical Settlements Model Act. Adhering to these standards protects the policyholder’s interests.
  3. If the insured has a terminal illness with more than two years of life expectancy, the settlement may be taxable. Delaying settlement until within two years might affect tax treatment. A financial advisor can help explore options, including strategies to reduce tax liability.
  4. For chronically ill insured individuals, proceeds used for non-medical expenses may be taxable. Funds for personal expenses could incur taxes.

Consider all factors, including tax implications, when managing life insurance. Even if some proceeds are taxable, selling your policy might be the best choice for your family. Weigh immediate financial needs and long-term impact, and how it affects estate planning.

HOW CAN SUMMIT LIFE SETTLEMENTS HELP?

If you’re considering viatical settlements, partnering with an experienced broker is crucial to securing the best offer for your policy. These professionals excel at navigating the often complex viatical settlement process. With their extensive buyer networks, skilled brokers can obtain competitive offers reflecting your policy’s market value. They also provide insights and guidance to ensure informed decisions that align with your financial goals.

Summit Life Settlements is a trusted Viatical Settlement Broker dedicated to helping policyholders explore options for selling life insurance policies. Our team offers personalized guidance throughout the process, recognizing the complexity and emotion involved in selling a policy. We approach each case with care, ensuring clients are comfortable and informed at every step.

Our Summit Life Marketplace helps policyholders get the highest value for their viatical settlements with a hassle-free experience. We simplify the life settlement process, connecting policy owners with qualified buyers for efficient transactions that prioritize our clients’ best interests. We work with a network of licensed buyers to ensure clients receive fair market value. We handle all paperwork and negotiations, making the process stress-free. From consultation to final sale, our aim is a seamless experience focusing on clients’ needs.

At Summit Life Settlements, we provide honest, clear information. We offer free consultations and policy evaluations to help seniors understand their options. Our team is available to answer questions and provide updates to ensure our clients have the knowledge and resources to make the best financial decisions. Contact Us to unlock the potential of your life insurance policy for a brighter financial future.

Viatical settlement proceeds are often tax-free when the settlement involves a terminally ill individual, but it’s crucial to consult with a tax professional for specific guidance.

Yes, the tax treatment may differ. Viatical settlements for terminally ill individuals often have favorable tax treatment compared to life settlements. Consultation with a tax advisor is recommended.

If the viator outlives the life expectancy predicted in the viatical settlement, it may impact the tax treatment. Consult with a tax professional to understand the specific implications.

Some states may offer exemptions for viatical settlement proceeds from state taxes. Individuals should check their state’s regulations or consult with a tax advisor for guidance.

While viatical settlement proceeds are typically tax-free for terminally ill individuals, certain circumstances or changes in tax laws could impact taxation. Consultation with a tax professional is advisable.

Changes in policy ownership resulting from a viatical settlement may impact taxation. It’s essential to seek guidance from a tax professional to understand the implications.

Tax deductibility of premiums paid by the new policy owner after a viatical settlement can vary. Individuals should consult with a tax advisor to determine the specific tax implications.

Viatical settlement proceeds may impact eligibility for certain government assistance programs. It’s advisable to consult with a financial advisor or benefits specialist for guidance.

Viatical settlements may receive preferential tax treatment compared to regular income, but it’s essential to understand the specific tax laws and consult with a tax professional.

In some cases, medical expenses related to the viator’s terminal illness may be deductible. Consultation with a tax professional is crucial to determine eligibility and maximize potential offsets.