Viatical Settlements
A viatical settlement is an arrangement in which an individual with a terminal illness sells their life insurance policy to a third-party vendor for less than its mature value so that they can benefit from the proceeds while alive. Typically, the funds are paid in a lump sum to those with 24 months or less to live.
Any amounts received under a life insurance contract on the life of a terminally ill individual are excluded from gross income. Amounts received under a life insurance contract by chronically ill individuals are also excluded from gross income if certain requirements are satisfied. Similar exclusions apply when the amounts are received as a result of a sale or assignment of the life insurance contract to a viatical settlement provider.
Special Requirements for Chronically Ill Individuals
The nontaxable part of any amounts received under a life insurance contract on the life of an individual who is chronically ill is limited to the cost of qualified long-term care services.
Definitions:
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Terminally Ill Individual - the term “terminally ill individual” means a person who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months of the date of certification.
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Chronically Ill Individual – a “chronically ill” individual is one who has been certified within the previous 12 months by a licensed health care practitioner as:
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being unable to perform, without “substantial assistance” from another individual, at least two activities of daily living for at least 90 days due to a loss of functional capacity,
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having a similar level of disability as determined under IRS regs prescribed in consultation with the Dept of Health and Human Services, or
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requiring “substantial supervision” to protect the individual from threats to health and safety due to “severe cognitive impairment,” even if the individual is physically able.
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