Life Settlement vs Viatical Settlement: Payouts, Taxes, Protections

A life settlement and a viatical settlement are the same transaction with one decisive difference: the seller’s health. In both, the owner of a life insurance policy sells it to a third-party buyer for a lump sum that lands between the policy’s cash surrender value and its death benefit. It’s a viatical settlement when the seller has been diagnosed as terminally or chronically ill, and a life settlement when the seller is not facing a health crisis and is usually 65 or older. That single distinction drives the payout, the taxes, and much of the paperwork.

Who Qualifies for Which

In a viatical settlement, the seller (legally the “viator”) has been certified by a physician as terminally or chronically ill, typically with a life expectancy of two years or less. In a life settlement, the seller has no such diagnosis and is generally an older adult who no longer needs or wants the coverage.¹

In either transaction, the buyer takes over ownership of the policy, pays all future premiums, and collects the death benefit when the insured dies.² Only the policy owner has legal authority to sell, and where the insured is a different person, that person’s consent is generally required.¹

How Much Each Pays

Life expectancy is the single biggest factor in pricing. A shorter expected life means the buyer collects the death benefit sooner and pays fewer premiums along the way, so the offer to the seller is higher. That’s why viatical settlements pay considerably more as a percentage of face value than life settlements do.

Viatical payouts typically fall between 50% and 85% of the death benefit,³ and where inside that band a given offer lands tracks closely to the seller’s prognosis:

Less than 6 months: 75%–85% of face value
6 to 12 months: 60%–80%
12 to 24 months: 50%–70%
24 to 48 months: 40%–60%⁴

Life settlement payouts are lower. Most cluster around 20% of the death benefit, with a typical range of 10% to 35%.⁵ Even at the low end, that’s usually far more than what the insurer would pay for a surrender. According to 2025 data from the Life Insurance Settlement Association, the average life settlement payout was $212,066, compared with an average insurer surrender value of $24,360, a ratio of nearly nine to one.⁶

Beyond health, several factors move the offer in either transaction: the projected cost of future premiums, the type of policy (whole life and universal life generally receive better offers than term), the size of the death benefit (most buyers want at least $100,000 in face value), and the financial strength of the issuing insurer.⁵

How the Proceeds Are Taxed

Tax treatment is where the two transactions diverge most sharply, and where sellers most often misjudge what they’ll actually keep.

Viatical Settlements

Under IRC Section 101(g), added by the Health Insurance Portability and Accountability Act of 1996, viatical proceeds are excluded from gross income for terminally ill sellers, meaning the money is entirely tax-free at the federal level with no dollar cap.⁷ To qualify, a physician must certify that the seller’s illness is expected to result in death within 24 months, and the buyer must be a “qualified viatical settlement provider” licensed in the insured’s state of residence.⁸

For chronically ill sellers, the exclusion is narrower. The proceeds are tax-free only if used to reimburse qualified long-term care expenses, or if paid on a per-diem basis subject to a daily and annual cap indexed for inflation.⁷ The federal exclusion is federal only; state tax treatment varies.⁹

Life Settlements

Sellers who aren’t terminally or chronically ill don’t qualify for the Section 101(g) exclusion. Their proceeds are taxed in three layers. The portion up to the seller’s cost basis (total premiums paid) is tax-free. The portion above basis but below the policy’s cash surrender value is taxed as ordinary income. Anything above the cash surrender value is a capital gain.¹⁰ All gains are also subject to the 3.8% net investment income tax.¹¹

The Tax Cuts and Jobs Act of 2017 improved this math for sellers. Before the TCJA, Revenue Ruling 2009-13 required sellers to reduce their cost basis by the cumulative cost of insurance charges embedded in their premiums, inflating the taxable gain. The TCJA eliminated that reduction. Under amended IRC Section 1016(a)(1)(B), the adjusted basis is now total premiums paid, with no reduction for mortality or expense charges,¹²¹³ and the change applies retroactively to transactions after August 25, 2009.

How the Process Works

Mechanically, the two transactions look alike, though viatical settlements usually move faster given the seller’s medical situation. The typical path:

Engage a licensed broker or provider. A broker represents the seller, shops the policy to multiple providers, and negotiates offers. Confirm licensing in your state for both the broker and any provider.³
Medical underwriting. The provider reviews medical records and works with life expectancy underwriters to estimate how long the insured is expected to live. That estimate drives the offer.¹⁴
Offer and negotiation. Competing bids are common and worth soliciting.
Closing and payment. Once the seller accepts, ownership transfers and the seller receives a lump sum. In Illinois, for example, the provider must send funds within three business days after receiving written confirmation of the transfer.³

Timelines vary. For a viatical settlement, initial evaluation typically takes one to two weeks, medical underwriting runs from a few days to several weeks depending on how quickly records arrive, and closing can add up to three more weeks.¹⁵ Either transaction generally completes within two to four months.

Seller Protections

Life and viatical settlements are regulated primarily by state insurance departments, most of them working from the NAIC’s Viatical Settlements Model Act (Model #697), revised in 2007 to cover life settlements as well.¹⁶ Protections you can expect in most states include:

A rescission period, typically 15 to 30 days after signing, in which the seller can cancel and return the proceeds. In Arizona, sellers have 15 days, and if the provider fails to notify the seller of the right to cancel, the window extends to 30 days after that notice is given.¹⁷
Mandatory disclosures covering tax consequences, the loss of the death benefit for beneficiaries, possible effects on Medicaid eligibility, and the fact that investors will acquire a financial interest in the seller’s death.³
Licensing for both providers and brokers, with providers generally required to show financial responsibility, often through a $250,000 surety bond.¹⁸
Privacy rules that bar licensees from disclosing the insured’s identity or medical information without written consent, with limited exceptions for regulators.¹⁸
A fiduciary duty owed by brokers to sellers, and a prohibition on calculating broker fees as a percentage of face value; fees must be based on the settlement offer obtained.¹⁹

Most states also impose a two-year waiting period after a policy is issued before it can be settled, with exceptions for terminal or chronic illness, death of a spouse, divorce, retirement, or bankruptcy.¹⁷ Policies that show signs of stranger-originated life insurance (STOLI), such as non-recourse premium financing, face a longer five-year lockout under the NAIC model.¹⁶ If your policy is newer than two years, either transaction may be off the table absent a qualifying exception.

The Alternative to a Viatical Settlement: Accelerated Death Benefits

Before selling a policy, a terminally ill policyholder should check whether the policy already includes an accelerated death benefit (ADB). An ADB is a feature built into many life insurance policies that lets a qualifying policyholder draw a portion of the death benefit early, directly from the insurer. The policy stays in force, and whatever death benefit is left after the advance still goes to the original beneficiary.²⁰

ADB payouts typically range from 25% to 100% of face value, though they’re often capped between 50% and 80%.²⁰ Viatical settlements frequently pay more (50% to 85%) and clear the seller of any further premium obligation, but the trade-off is that the entire policy is gone and beneficiaries receive nothing.³

One caution applies to both ADBs and settlements: life insurance with cash value is counted as an asset for Medicaid purposes in most states, and a lump-sum payment can push an applicant over the asset limit and affect eligibility for other means-tested benefits.²¹

1
Maine.gov. Viatical and Life Settlements Understanding
2
State of New Jersey Department of Banking and Insurance. Viatical Settlements
3
Illinois Department of Insurance. Viatical Settlements and Accelerated Death Benefits
4
American Life Fund. Viatical Settlement
5
Citizens Life Group. Average Life Settlement Offer
6
Life Insurance Settlement Association. LISA Member Data Collection Survey
7
The CPA Journal. Tax Treatment of Viatical Settlements
8
Internal Revenue Service. Instructions for Form 1099-LTC
9
U.S. Office of Personnel Management. Benefits Administration Letter 96-206
10
The Tax Adviser. Life Settlements
11
Keiter CPA. Life Insurance Policies Planning Options
12
Internal Revenue Service. Revenue Ruling 2020-05
13
The CPA Journal. The Impact of the Tax Cuts and Jobs Act on Life Insurance
14
Investor.gov. Life Settlements
15
LISA Settlements. How Long Does the Viatical Settlement Process Typically Take
16
National Association of Insurance Commissioners. Viatical Settlements Model Act Overview
17
Arizona Legislature. ARS 20-3211
18
National Association of Insurance Commissioners. Viatical Settlements Model Act
19
Georgia Secretary of State. Georgia Life Settlements Regulation, Rule 120-2-93
20
Alabama Department of Insurance. Benefits Questions and Answers
21
Medicaid Planning Assistance. Life Insurance Eligibility Impact