Life and Health Insurance · Life Insurance · 6 min read
Selling an Existing Life Contract
- Differentiate between life settlements and viatical settlements, including the roles of the policyowner, broker, and provider.
- Explain how an absolute assignment transfers ownership, affects beneficiaries, and shifts premium obligations to the buyer.
- Identify alternatives to selling a policy, tax implications of settlement proceeds, and key consumer protections under state law.
Understanding Life and Viatical Settlements
A life settlement is the sale of an existing life insurance policy to a third party. In this transaction, the payment to the seller is generally more than the policy cash surrender value but less than its expected death benefit. The person selling the policy is called the policyowner or seller. The purchaser is called the life settlement provider, which is an entity or person that enters into the contract to buy the policy. A life settlement broker represents the policyowner and negotiates the sale with providers on the owner's behalf. The broker owes a fiduciary duty exclusively to the policyowner, never to the buyer or provider.
Viatical settlements commonly involve an insured who is terminally or chronically ill, but state definitions of viatical and life settlements vary; the federal tax definitions of those illnesses do not determine how every state classifies a sale. The seller in a viatical settlement is referred to as the viator. Viatical settlements originally developed as a way for seriously ill individuals to access funds for medical and living expenses. In contrast, standard life settlements often involve older insured individuals who do not necessarily have a terminal illness.
For federal tax treatment of viatical settlements, a terminal illness generally requires a physician certification that the condition is reasonably expected to cause death within 24 months. For federal tax purposes, chronic illness generally requires certification within the preceding 12 months that the insured needs substantial assistance with at least two activities of daily living for at least 90 days, or needs substantial supervision because of severe cognitive impairment.
Settlement providers determine their purchase offers based on several factors, including the insured's life expectancy, future premium costs, and prevailing interest rates. A shorter life expectancy generally results in a higher purchase offer because the investor expects to pay fewer future premiums before receiving the death benefit. The exact offer depends on the policy and applicable state law.
| Feature | Life Settlement | Viatical Settlement |
|---|---|---|
| Health Status of Insured | Often older; not necessarily terminally ill | Commonly involves a terminally or chronically ill insured; the 24-month life-expectancy test is a federal tax rule, not a universal state settlement definition. |
| Name for the Seller | Policyowner or seller | Viator |
| Purchase Price Range | Usually more than the cash surrender value and less than the death benefit, but a price above cash surrender value is not guaranteed. | Usually more than the cash surrender value and less than the death benefit, but a price above cash surrender value is not guaranteed. |
| Primary Federal Tax Benefit | Proceeds up to basis are non-taxable; excess is taxable | Generally income tax-free for terminal illness under federal rules |
Common mistakes
- Believing that a settlement broker represents both the buyer and the seller, when in fact the broker owes a fiduciary duty exclusively to the policyowner.
- Assuming that life settlement proceeds are completely tax-free like death benefits, when standard life settlements often trigger ordinary income and capital gain taxes.
- Thinking that the issuing insurance company purchases the policy, when the actual purchaser is an independent life settlement provider.
- An absolute assignment transfers the policyowner's existing rights to the buyer, subject to any irrevocable beneficiary's rights and applicable settlement rescission rights.
Key points
- A life settlement involves selling an existing life insurance policy to a third-party provider, typically for more than the cash value but less than the face amount.
- Viatical settlements commonly involve terminally or chronically ill insureds, but state definitions vary; federal tax rules separately define terminal and chronic illness and impose additional requirements.
- A life settlement broker negotiates the transaction on behalf of the policyowner and owes that owner an exclusive fiduciary duty.
- Ownership is transferred via an absolute assignment, making the buyer responsible for future premiums and giving the buyer the right to name the beneficiary.
- The issuing insurer is not a party to the settlement agreement; it simply continues to service the policy, collect premiums, and pay the ultimate death benefit.
- Viatical proceeds for terminally ill insureds are generally income tax-free, whereas standard life settlements are taxed in tiers based on basis, cash surrender value, and sale price.
- Policyowners should consider alternatives such as accelerated death benefits, policy loans, partial surrenders, dividend adjustments, and nonforfeiture options before selling.
Practice this section
Explained Life Insurance questions, no account needed. Life Insurance practice test
The full lesson continues with 4 more sections with exam tips, audio in English and Spanish, 5 Check yourself questions and 20 flashcards.
- 1 month
$53.99$26.99 - 3 months
$158.99$79.49 - Lifetime
$323.99$161.99
One payment, no subscription.
See Life and Health plansAlready a member? Log in
Sample lesson: Risk and Insurable Losses in Life Insurance25 practice questions on this exam
Each Life and Health practice test has 25 original questions with the answers explained. No account needed.
Open the Life and Health practice testsOriginal lesson written for Life and Health Insurance practice · updated October 29, 2026. Exam names are trademarks of their owners; tests.global is not affiliated with them.