If you’ve ever looked into options for accessing cash later in life—or during a major life event—you might have stumbled upon terms like “viatical settlements” and “life settlements.” They sound similar, and while they both involve selling a life insurance policy, they serve different purposes and are used under very different circumstances.
In this guide, we’re going to take a deep dive into both viatical and life settlements. We’ll break down what they are, how they work, who they’re for, and why someone might consider them. If you’re trying to decide whether this type of financial strategy makes sense for you or a loved one, this is the place to start.
Let’s walk through the ins and outs so you can feel confident understanding and evaluating these options.
Viatical vs. Life Settlements: What’s the Difference?
Let’s begin by laying it all out side by side. Viatical settlements and life settlements both involve selling your life insurance policy to a third party. In exchange, you get a lump sum of cash—usually more than the policy’s cash surrender value, but less than the death benefit.
However, they’re used in very different life situations. Here’s a side-by-side comparison to make things clearer:
| Feature | Viatical Settlement | Life Settlement |
| Who Qualifies | Terminally ill policyholders | Seniors (typically age 65+) with a life expectancy of 10+ years |
| Health Status Required | Diagnosed with a life expectancy of 2 years or less | Generally in average or declining health but not terminal |
| Tax Treatment | Often tax-free (check IRS guidelines) | May be taxed depending on gain |
| Payout Amount | Higher due to shorter life expectancy | Usually lower compared to viaticals |
| Use of Funds | Medical bills, hospice care, daily living | Retirement income, long-term care, financial needs |
| Type of Policy Eligible | Usually whole, universal, or convertible term | Whole, universal, and some term policies |
| Buyer’s Responsibility | Assumes premiums and collects death benefit later | Same as viatical: buyer pays premiums going forward |
So, while the process is similar, the purpose and context are very different. Viatical settlements are often about financial relief in a crisis. Life settlements are more strategic—about unlocking value from an asset you no longer need.
Reasons People Consider Viatical or Life Settlements
There’s no one-size-fits-all reason someone chooses to sell their life insurance policy. The motivations are personal, and sometimes even emotional. But there are some common themes. Let’s look at why people might go down this path.
Medical Expenses Are Overwhelming
For those facing a terminal illness, medical care can become a financial burden. A viatical settlement can help cover treatments, medications, hospice services, or even home renovations to accommodate care needs.
You No Longer Need the Policy
Sometimes, the original reason for buying the policy—like supporting a spouse or children—is no longer relevant. Maybe your children are grown and financially independent, or your spouse has passed away. Rather than continue paying premiums, you might decide to cash out with a life settlement.
Premiums Are Too High
As you age, insurance premiums can become a real pain point. If you’re on a fixed income, those monthly payments might not be sustainable. A settlement can relieve you of those costs.
You’re Restructuring Your Retirement Plan
Many seniors realize they’re sitting on a valuable asset that they don’t really need anymore. A life settlement can be part of a broader retirement strategy, freeing up cash for travel, long-term care, or just enjoying life.
You Want to Leave a Different Kind of Legacy
Instead of leaving behind a lump sum death benefit, some people prefer to use the money now—perhaps helping their grandchildren with college tuition or donating to a charity while they’re still alive.
You’re in a Financial Crisis
Whether it’s mounting debt, a divorce, or another life disruption, sometimes selling a life insurance policy is about survival. Both viatical and life settlements can offer quick liquidity when it’s needed most.
How the Settlement Process Works
If you’re considering a viatical or life settlement, it helps to know what to expect. The process isn’t as complicated as you might think, but there are a few important steps and players involved.
Step 1: Evaluate Your Policy
Not all policies qualify. Most buyers are looking for policies with a death benefit of at least $100,000. Whole life and universal life policies are most desirable, though some term policies can be sold if they’re convertible.
Step 2: Assess Your Health
For viatical settlements, you’ll need to provide documentation of a terminal illness, including physician statements and prognosis details. Life settlements typically require less urgent health documentation, but medical records are still a factor.
Step 3: Work With a Settlement Provider or Broker
You can either go through a licensed settlement provider (who works directly with buyers) or a broker (who shops your policy around to get you the best offer). Just make sure they’re licensed in your state.
Step 4: Receive Offers
Once your policy and health info are reviewed, you’ll start receiving offers. The lump sum offered will depend on your life expectancy, policy size, and terms.
Step 5: Accept an Offer and Transfer Ownership
Once you accept an offer, you’ll sign over the policy to the buyer. They become the new owner, pay the premiums, and collect the death benefit down the road.
Step 6: Use the Funds
After the sale closes—usually within a few weeks—you’ll receive your lump sum payment. There are no restrictions on how you use it.
FAQs
Will I owe taxes on a viatical or life settlement?
It depends. Viatical settlements are often tax-exempt, especially if the policyholder is terminally ill.
How long does the settlement process take?
It can take anywhere from a few weeks to a couple of months.
What happens to my beneficiaries?
Once the policy is sold, the new owner becomes the beneficiary. Your original beneficiaries will no longer receive the death benefit.
Do I have to be terminally ill to sell my policy?
No. Only viatical settlements require a terminal illness. If you’re a senior with a permanent life insurance policy, you may qualify for a life settlement even if you’re in relatively good health.
Are there risks to selling my policy?
Yes. You give up the death benefit, and your loved ones won’t receive anything from the policy after your passing.
Conclusion
Viatical and life settlements are powerful financial tools—but they’re not for everyone. If you’re facing a terminal illness, a viatical settlement can provide critical funds when you need them most. If you’re a senior rethinking your financial picture, a life settlement might be a smart move to unlock cash from an underused asset.
But before you move forward, take the time to weigh the pros and cons. Talk with a financial advisor or estate planner. Understand the tax implications, the effect on your heirs, and your long-term financial goals.
Selling a life insurance policy is a big decision. But when done thoughtfully and for the right reasons, it can be a lifeline—or a smart retirement strategy—that gives you more control over your financial future.