When planning for senior care, funding options become a crucial concern. Among the various methods available, selling a life insurance policy can be a practical solution. Life settlements and viatical settlements are two distinct avenues for this purpose. Both options can provide the necessary funds, but each comes with its own set of qualifications and considerations.
A life settlement is a financial transaction where a policy owner sells their life insurance policy to a third party. The buyer, often an institutional investor, takes over premium payments and becomes the policy beneficiary. Upon the insured’s death, the buyer receives the death benefit. This arrangement allows the original policyholder to receive a cash payout higher than the policy’s surrender value but less than the death benefit.
Typically, individuals who pursue life settlements are older adults needing funds for senior care. Several criteria need to be met to qualify for a life settlement. Generally, a policyholder needs to be over 65, and the policy should be a whole life, convertible term life, universal life, or survivorship universal life policy. Additionally, the policy should have a death benefit exceeding $100,000, with premiums less than 5% of the death benefit, and be active for at least 25 months.
On the other hand, a viatical settlement is an option primarily for those diagnosed with a terminal or chronic illness. The policyholder sells their life insurance policy to access immediate funds to cover medical bills, debts, and various care needs. As with life settlements, the third party assumes the premium payments and eventually receives the death benefit. However, the critical factor is the insured’s life expectancy, which should be two years or less, confirmed by a medical professional.
Viatical settlements often present higher risks for investors due to the uncertainty of the policyholder’s lifespan. Yet, they offer significant payouts for the policyholder, as the value typically increases with a shorter life expectancy. The process usually involves disclosing medical records or undergoing a life expectancy assessment, with payouts delivered within weeks.
Both life settlements and viatical settlements offer lump-sum payments with no usage restrictions, catering to various financial needs. However, it is essential to consider the tax implications when choosing between the two options. The IRS generally views viatical settlement payouts as an advance on the policy’s death benefit, making them non-taxable in many cases. Conversely, life settlement payouts may be subject to taxes, and different states may have specific regulations. Consulting a tax professional is advisable to clarify potential liabilities.
In making a decision, it’s crucial to weigh the immediate financial benefits against potential tax obligations and the changes in one’s financial status. Understanding these nuances can lead to more informed and financially sound choices for funding senior care.
We are deeply connected to providing guidance on such financial decisions, especially life and viatical settlements. We offer free quotes and estimates to help our clients make the most informed choices. Our goal is to ensure that you have the necessary information to decide what best suits your changing needs. If managing the costs of senior care is a concern, we’re here to support you with tailored financial solutions.
