What is a viatical settlement contract?
A viatical settlement is a contractual agreement to provide a life insurance policyholder immediate cash in exchange for the sale and transfer of life insurance policy ownership rights.
What happens in a viatical settlement?
A viatical settlement is an arrangement in which someone who is terminally or chronically ill sells their life insurance policy at a discount from its face value for ready cash. The buyer of a viatical settlement pays the seller a lump sum cash payout and pays all future premiums left on the life insurance policy.
What is viatical policy?
Primary tabs. A viatical settlement, also known as a life settlement, is a sale of a life insurance policy of an insured person with an abbreviated life expectancy. Sellers are typically terminally ill patients who want to cash out of their life insurance policies before death.
Who qualifies for a viatical settlement?
Who Qualifies for a Viatical Settlement? Life insurance policyholders who are seriously or chronically ill, have a policy with a face value of a minimum of $100,000, and have held their policy for at least two years will typically qualify for a viatical settlement.
What test defines an MEC?
Key takeaways. A modified endowment contract (MEC) is a cash value life insurance policy that gets stripped of many tax benefits. The seven-pay test determines if the policy qualifies as an MEC. MECs ended a popular way to shelter money from taxes by borrowing from insurance policies whose cash value grew too quickly.
What is the difference between a viatical settlement and a life settlement?
Life settlements are also typically for people above 65 years old, whereas a viatical settlement is designed to provide a relief option for a person of any age facing extreme medical circumstances.
What is the primary feature of a viatical settlement?
(The primary feature of a viatical settlement is the prepayment of a reduced death benefit.)
Are viatical settlements securities?
Are viatical settlements considered to be securities? The Washington Securities Division examines all viatical settlement investments on a case-by-case basis. It has been our experience that these investments are often securities under the Securities Act of Washington.
What is 7 pay MEC limit?
This is called the 7-pay limit or MEC limit, and is based on rules established by the Internal Revenue Code, setting the maximum amount of premium that can be paid into the contract during the first seven years from the date of issue in order to avoid MEC status.
What is a 7 pay test?
The seven-pay test determines whether the total amount of premiums paid into a life insurance policy, within the first seven years, is more than what was required to have the policy considered paid up in seven years.
Is a viatical settlement taxable?
Most of the time, viatical settlements are not taxable. Settlement proceeds for terminally ill insureds are considered an advance of the life insurance benefit. Life insurance benefits are tax-free, and so it follows that the viatical settlement wouldn’t be taxed, either.
Can I sell my term life insurance policy for cash?
You can sell a term life insurance policy for cash, but your policy will usually have much more value on the market if it is the type that can be converted to a whole or universal life policy. The provision in a term life policy that allows for this change is called a conversion rider.
What does viatical settlement mean?
A viatical settlement is an arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies.
What does a viatical settlement provider do?
A viatical settlement provider is a party who exchanges something of value to a person with a life insurance policy in order to obtain the right to the death benefits of the life insurance policy. It is common for a sum of cash to be exchanged to the life insurance policy holder for the rights to the death benefits.
A viatical settlement (from the Latin “viaticum”) is the sale of a policy owner’s existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum.
How are viatical settlements taxed?
According to the IRS, the proceeds from a viatical settlement may be taxed like ordinary income if the conditions mentioned above aren’t met. In some cases, a viatical settlement is a good option even if there are tax implications.