Life Settlements and Viatical Settlements: The Difference Between the Two

Life settlements and viatical settlements are similar in that they can both convert life insurance policies into cash, but they're not the same. Both involve the sale of life insurance policies with the proceeds going to the insured, but the outcomes can be very different.

Here are some basic facts that will help clear the air, distinguish the differences and help you decide between a life settlement, viatical settlement or neither.

Life Settlements are for Seniors, Viatical Settlements are for the Dying

A life settlement is a financial planning tool that can typically be used by anyone over the age of 65 who has a life expectancy of less than 13 years. These may be people who have had a significant change in their overall health, but who aren't terminally ill.

Typically, life settlements only apply to life insurance policies with large face amounts. This is because most buyers aren't interested in the small returns from small policies. On the other hand, a viatical settlement is typically reached or sold when the insured has a life expectancy that is less than two years. However, these regulations can vary from state to state.

Most viatical settlements are fairly small and involve smaller policies with face amounts of around $50,000 and less. Many viatical settlements depend on either an individual investor buying the insurance policy or a small firm that specializes in viaticals.

A Life Settlement is NOT a Security

When an insurance advisor raises funds for a financial entity or resells purchased policies to investors, these are considered securities and are regulated as such.

However, if an individual policy owner sells their life insurance policy to a licensed settlement provider, that transaction isn't considered a security and therefore not subject to securities' regulations and taxes.

Your Life Insurance Policy May Be Worth More than Its Cash Surrender Value

Over one-fifth of all life insurance policies belonging to people over the age of 65 are worth more than their cash surrender value because of a decline in health. This creates an opportunity for both clients and settlement providers to profit from their life insurance policies.

Before you commit to a life settlement, discuss the financial and legal implications with your estate attorney and tax advisor. They can help you to determine if a life settlement is the right choice for you.