Introduction
People often use the terms life settlement and viatical settlement interchangeably. They are related—but not the same.
Both involve selling an existing life insurance policy to a third party for a lump-sum payment. The crucial difference is why the transaction exists and who it is designed to serve.
Typical search questions include:
- What is the difference between a life settlement and a viatical settlement?
- Is a viatical settlement tax-free?
- Who qualifies for a viatical settlement vs life settlement?
- Are both regulated and legal?
If you’re new to the basics, start here:
Read More: How the Life Settlement Process Works
This guide breaks down all major and minor differences (eligibility, medical criteria, regulation, taxes, process, risks, and outcomes) in a clear, institutional way. Educational content only. Not legal or tax advice.
Quick Summary: Life Settlement vs. Viatical Settlement
The simplest explanation:
- Life settlement: typically for seniors who no longer want/need a policy or can’t justify premiums.
- Viatical settlement: for insured individuals who are terminally ill or chronically ill, often to access funds for care and living needs.
Comparison Table: Major Differences
| Category | Life Settlement | Viatical Settlement |
|---|---|---|
| Primary Purpose | Financial/estate planning option for seniors | Liquidity related to terminal or chronic illness needs |
| Typical Insured Profile | Often age 65+ (not necessarily seriously ill) | Terminally ill or chronically ill (age can vary) |
| Medical Requirement | Not required to be terminally ill | Typically requires terminal illness or chronic illness criteria |
| Tax Treatment | Often partially taxable | May qualify for favorable (sometimes tax-free) treatment under specific rules |
| Regulation | State-level regulation (life settlement laws) | State-level regulation (viatical settlement laws; often explicit viatical model frameworks) |
| Underwriting Focus | Life expectancy + premiums + policy economics | Medical status + eligibility definitions + policy economics |
| Who Buys | Licensed providers; often funded by institutional capital | Licensed viatical providers; often similar buyers but different legal/tax category |
What Is a Life Settlement?
A life settlement is the sale of a life insurance policy by the policy owner to a licensed third party for a lump sum, typically:
- More than the policy’s cash surrender value
- Less than the death benefit
After the sale, the buyer becomes the owner and beneficiary, pays future premiums, and receives the death benefit when the insured passes away.
Read More: How the Life Settlement Process Works
Read More: Who Qualifies for a Life Settlement?
What Is a Viatical Settlement?
A viatical settlement is also the sale of a life insurance policy—but it is specifically tied to insured individuals who are:
- Terminally ill, or
- Chronically ill (as defined under applicable rules)
The concept developed to allow insured individuals facing serious illness to access funds while alive—often for medical costs, long-term care, or quality-of-life needs. The tax and regulatory frameworks around viaticals are often more explicit because of their connection to health status and consumer vulnerability.
Eligibility Differences: Who Qualifies?
Life Settlement Eligibility
Life settlement eligibility is usually based on actuarial/economic viability, including:
- Age (commonly 65+)
- Health profile (not necessarily terminal)
- Policy type (often permanent policies)
- Face amount (often $100k+)
- Premium burden and sustainability
Viatical Settlement Eligibility
Viatical eligibility generally requires that the insured meets terminal or chronic illness definitions. A key federal reference point is U.S. tax code guidance around the treatment of certain death benefits and viatical settlements.
Practical implication: a viatical settlement is not “just another life settlement.” It’s typically triggered by a medical status that meets defined standards.
Tax Differences: Often the Biggest Practical Distinction
Life Settlements: Often Partially Taxable
Life settlement taxation is commonly described in layers (return of basis, ordinary income component, capital gain component), grounded in IRS guidance including Revenue Ruling 2009-13.
Read More: How Are Life Settlements Taxed?
Viatical Settlements: Potentially Favorable Treatment
Viatical settlements may qualify for favorable tax treatment when they meet requirements tied to terminal/chronic illness and eligible provider standards. The IRS instructions for Form 1099-LTC discuss conditions under which viatical settlement providers must meet NAIC-related requirements for terminally or chronically ill insureds.
Important nuance: “Tax-free” is not automatic in every case. Eligibility depends on definitions, provider status, and circumstances. This is exactly why viaticals are treated as a distinct category.
Regulatory Differences: Similar Framework, Different Emphasis
Both life and viatical settlements are primarily regulated at the state level (not by a single federal regulator). The GAO has documented that life settlement regulation is handled largely through state insurance departments and that state laws can vary.
Viatical Model Regulation: The NAIC has a Viatical Settlements Model framework (often referenced as Model #698 materials) that states may use as a basis for regulation.
Life Settlement Regulation: Life settlements likewise operate under state laws requiring licensing, disclosures, rescission rights, and anti-fraud provisions.
Read More: Are Life Settlements Regulated?
Differences in Purpose and Consumer Context
Why People Use Life Settlements
Common drivers include:
- Premiums rising beyond what feels rational
- Coverage no longer needed after estate plan changes
- Business succession changes
- Desire for liquidity in retirement
- Avoiding lapse/surrender when value exists
Read More: Surrender vs. Life Settlement: Key Differences
Read More: Alternatives to a Life Settlement
Why People Use Viatical Settlements
Viaticals are often driven by an immediate need for funds due to serious illness, care expenses, or a desire to use value while alive. Because the insured may be medically vulnerable, regulatory disclosure and suitability concerns are often more sensitive.
Underwriting and Valuation: Similar Tools, Different Triggers
Life Settlement Valuation
Life settlements are priced using institutional methods such as life expectancy projections, discounted cash flow modeling, and risk-adjusted return thresholds.
Read More: Understanding the Secondary Market for Life Insurance
Viatical Valuation
Viaticals also use underwriting and life expectancy estimates, but the starting point is often a qualifying terminal/chronic status. That medical status can shift timelines, expectations, and sometimes the regulatory/tax treatment.
Process Differences: What Changes Operationally?
Both processes involve policy review, authorization forms, underwriting, and closing via ownership transfer. However, viaticals may involve:
- More immediate timelines (because of urgency)
- More explicit medical documentation standards
- Additional compliance sensitivity in disclosures and communications
Risk Differences (Major and Minor)
Many risks overlap, but emphasis differs.
Shared risks (both): Permanent transfer of death benefit, tax consequences, privacy/medical record disclosure, and impact on Medicaid.
Read More: Risks of Selling a Life Insurance Policy
Risks that often matter more in viaticals: Greater urgency can lead to rushed decisions, and there is potential for public benefit complications when large sums are received during care planning.
Ethical Misconceptions: “Betting on Death”
This comes up constantly, especially with viaticals. The institutional reality is actuarial and portfolio-based; the market functions through regulated structures and statistical underwriting.
Read More: Common Misconceptions About Life Settlements
Frequently Asked Questions
1) Is a viatical settlement the same as a life settlement?
No. Both involve selling a policy, but viaticals are tied to terminal or chronic illness status and may be treated differently for tax and regulatory purposes.
2) Are viatical settlements tax-free?
They can be, depending on whether the insured meets terminal/chronic illness definitions and whether required conditions are met. Review IRS guidance and consult a tax professional.
3) Can a healthy senior get a viatical settlement?
Usually no. Healthy seniors are more commonly in the life settlement category. Viaticals are generally tied to terminal/chronic illness criteria.
4) Are both regulated?
Yes—primarily at the state level. NAIC model frameworks and state insurance departments play central roles.
For more answers, visit our FAQ page.
Key Takeaways
A life settlement is typically a senior-focused financial planning option tied to policy economics. A viatical settlement is typically tied to terminal/chronic illness and may carry different tax and compliance treatment.
If you’re deciding between paths, the right “next step” is usually to first determine your category:
- Do you meet terminal/chronic criteria (viatical)?
- Or is this a senior/policy-economics transaction (life settlement)?
Ready to find out which option fits your needs? Contact us today to start an Educational Review.