An older adult man sits on a couch and turns to smile at the camera.
Life settlements and viatical settlements can help pay for senior care, but they are two distinct forms of funding, and you need to meet certain qualifications.

There are many ways to pay for senior care expenses. If you have a life insurance policy, you may be able to sell it and use funds from that sale to help pay for the cost of senior care. If you’re in the right circumstances, you can sell your policy for a life settlement or viatical settlement. Here are the differences between a life settlement and a viatical settlement, including qualifications, payout factors, and tax considerations.

What is a life settlement?

A life settlement occurs when a life insurance policy owner sells their policy to a third party, usually an institutional investor or life settlement broker, to receive a cash payout. This payout will be larger than if you were to relinquish your policy outright, but it would have less value than the actual death benefit or face amount of the policy. 

Once the third party purchases the life insurance policy, they are responsible for everything related to it, including premium payments. Upon the insured’s death, that company receives the full death benefit

In many cases, people who sell their policies can either not afford their premium payments or are older adults who need more funds to pay for senior living expenses. Life settlements are also commonly referred to as “senior settlements.”

Qualifying for a life settlement

There are multiple factors seniors must meet to qualify for a life settlement, which includes

  • Age. Seniors must be over the age of 65 to qualify.
  • Type of insurance. Policies that allow for a life settlement include Whole Life, Convertible Term Life, Universal Life, and Survivorship Universal Life.
  • The policy’s death benefit. Policies with a death benefit over $100,000 are eligible for a life settlement.
  • Premium payments. The policy’s premiums should be less than five percent of the death benefit.
  • Issue date of the policy. The policy must be active for at least 25 months before a policyholder can sell their policy for a life settlement. These regulations may also depend on the state you live in. 

Selling your policy

After selling your life insurance policy to a third party, you will receive a lump sum of cash. The amount of money you’ll receive in this payout depends on a few factors, including your policy’s death benefit amount and the term length. Your health may also play a factor, including your life expectancy — some companies may require you to go through a medical exam or share your medical records. 

It typically takes between three to four months to receive a life settlement. But, the amount can vary depending on the underwriting of your policy, the application process, and the type of insurance policy you have. There are no restrictions on how this money can be used to pay for senior care. 

What is a viatical settlement?

A viatical settlement is when a life insurance policyholder decides to sell their policy due to terminal or chronic illness. They then use the payout to pay for medical bills, debts, and their in-home, hospital, or hospice care. The policy is sold to a third party, who will then take on the premium payments and receive the full death benefit when the insured passes away. 

Companies may see viatical settlements as risky investments because it’s unknown how long the insured will live and if the company’s return on investment will be greater than the viatical settlement they paid out.

Qualifying for a viatical settlement

To qualify for a viatical settlement, the insured must be terminally or chronically ill and may be required to have a life expectancy of two years or less, as confirmed by a medical professional. The insured’s life insurance policy may also need to be older than two years and have a value of at least $100,000.

Selling your policy

The longer someone is expected to live, the lower their insurance payout will be. Therefore, with a short life expectancy, many terminally-ill policyholders can see a larger payout. Depending on the company that buys your policy, you may be required to share the medical records of your terminal diagnosis/chronic illness or get a life expectancy assessment from a doctor. 

The insured will receive their payout in a lump sum of cash in as little as three weeks after the investor initiates the process, and there are no rules or restrictions to how the insured can utilize the money. However, it is important to understand that receiving a lump sum of money may change your financial situation, resulting in the loss of certain government benefits like Medicaid.

What is the difference between a life settlement and a viatical settlement?

The main difference between a viatical settlement and a life settlement is that a viatical settlement is available to chronically or terminally ill policyholders with a life expectancy of two years or less. Therefore, a viatical settlement strictly depends not on age but on the individual’s health status.

Tax considerations

Life settlements and viatical settlements each have different tax considerations. The IRS sees the lump of money a terminally ill individual receives through a viatical settlement as an advance on the policy’s death benefit. Therefore, it may not be taxable in many cases. On the other hand, a life settlement may be subject to taxation

If the insured decides to take payments of their policy rather than a lump sum, they may be subject to interest. There are exceptions that can vary by state, so it’s critical to consult with a tax professional before taking a viatical or life settlement.