Are Viatical Proceeds Taxable?

Slide One: Someone who is terminally ill may find it difficult to cover care costs, and they’ll need to consider their financial options. One great way to get immediate cash is to exchange a life insurance policy for money. A viatical settlement is something many people consider to help ease financial burdens.

Slide Two: What are viatical proceeds?

When someone has a terminal illness, they may be eligible for a viatical settlement. This financial transaction allows a person with a life-threatening diagnosis to sell their life insurance policy to receive cash before their policy pays out. Viatical proceeds are designed to lessen the financial burden for someone who is terminally ill.

Slide Three: Qualifications for a viatical settlement

In order to qualify for a viatical settlement, a person must be given a remaining life expectancy of fewer than 24 months by a qualified doctor. Getting cash for a life insurance policy can be used to cover long-term care costs that are not covered by insurance. 

Slide four: Tax rules

As long as a person has a life expectancy of fewer than 24 months, their viatical settlement is not taxable. Under HIPAA, viatical proceeds are free from both capital gains and income tax. In order for the settlement to remain tax-free, the company purchasing the life insurance policy must hold a proper state license.

Slide Five: Filing viatical settlements

Even though a viatical settlement is not taxable, the settlement amount still needs to be filed properly during tax season. Whoever files taxes will need to ensure the proper amount and information (including the company who bought the policy) is included in order to ensure the settlement doesn’t get taxed.

Slide Six: Viatical vs. life settlement taxation

Viatical settlements and life settlements are sometimes confused. While both are essentially an advance on a policy’s benefit, viatical proceeds are the only amount that can’t be taxed. Life settlements are for healthy, senior-aged individuals and do not qualify to be tax-free.

Final Slide: Choosing a viatical settlement can be beneficial to anyone with a terminal illness. If the right third party is chosen, selling a life insurance policy can allow individuals to cover extensive costs during their lifetime.