Viatical Settlements - Tax Information

For people with less than two year life expectancy estimate - Any client who is estimated to have a life expectancy of less than two years receive their viatical settlement proceeds federal tax free**. This is determined by third party underwriters we use to determine your estimated mortality.

Example: Viatical Settlement

Death Benefits            $250,000
Cash Surrender Value   None (Term policy)
Premiums Paid             $5,000
Settlement Amount    $122,500

This policy has no cash value. The client received $122,500 instead of letting the life insurance policy lapse. Also the entire settlement is received tax free.

Client was a 45 year old man with stage 4 colon cancer. He used the funds to pay some debts and go on vacation with his family.
 

For people with two year to five year life expectancy estimate - There are taxes involved in viatical settlements when the person is estimate to live longer than two years. The breakdown of the tax implications is below. We work with our third party underwriters to insure we receive an accurate estimate so clients do not have to pay taxes when it is not necessary.

Example: Cash Surrender is less than premiums paid on the policy.

Death Benefits            $250,000
Cash Surrender Value   $10,000
Premiums Paid             $23,000
Settlement Amount    $60,000

Settlement Amount      $60,000
Premiums Paid             $23,000

Taxable Amount           $37,000 Capital Gain

In this case, the client received $50,000 more than the cash surrender value. This means we got our client $37,000 more than the insurance company would pay.


**In many states such as New Jersey, New York, and California they also receive it free of state income tax also. The best advice is to seek a tax advisor to see if your state viatical settlements tax laws.



Request More Information