A viatical settlement offers terminally ill individuals a unique financial option. By exchanging their life insurance policies, they receive cash. A company pays the insured a portion of the policy’s face value. In return, the company gains all rights to the policy upon the insured’s death. Generally, these life insurance payments to terminally ill individuals are not taxable.
The IRS refers to these funds as accelerated death benefits. According to the IRS’s Tax Guide for Seniors, taxes on viatical settlements are not owed under certain conditions. One such condition involves amounts paid as accelerated death benefits before the insured’s death. These are usually excluded from income if the insured is terminally or chronically ill.
According to IRS Publication 554 (2012), income exclusion cannot be claimed by a beneficiary who receives a settlement due to an insurable interest from being the insured’s employer or an investor.
To ensure your life insurance settlement is excluded from income, you must meet specific criteria. You must have a terminal or chronic illness. A physician must certify your condition, indicating that it likely results in death within 24 months following certification. Alternatively, a chronic illness within the past 12 months also qualifies.
Life expectancy plays a significant role in taxation. If your life expectancy is beyond 24 months, benefits will be taxed based on the premiums you have paid. Taxing a life settlement is complex. It depends on life expectancy, insurance premiums paid, and settlement amount received. For tax purposes, your settlement may be treated as ordinary income or a capital gain. Consulting a tax professional before settlement is advisable.
Meeting the “chronic illness” requirement involves losing functional capacity. This makes it difficult to perform essential activities without help. These activities include eating, using the toilet, moving between bed and wheelchair, bathing, dressing, and controlling bowels or bladder. Severe cognitive impairment also qualifies if substantial supervision is needed for health and safety.
For chronically ill individuals, life insurance settlement money may be entirely excluded from taxable income if used for long-term medical care. Money not spent on medical services may also be excludable, but up to a certain limit.
Understanding the tax implications of viatical settlements is crucial. Exclusion specifics and qualifying criteria are essential. A thorough grasp of these conditions helps ensure informed decisions.
We are dedicated to providing financial solutions tailored to evolving client needs. We specialize in offering cash for term life insurance policies, enabling policyholders to access liquidity when needed. Our service empowers clients with informed decision-making. We provide free quotes and estimates to facilitate the best choices for their financial future.
We understand the complexities of viatical settlements and associated tax implications. Our goal is to present clear, relevant information to help clients navigate their options. We are committed to offering financial flexibility. This allows clients to meet changing life goals and obligations while providing a security net for their future needs.
