Choosing to take a viatical settlement can be a challenging and emotional decision. When you or a loved one is diagnosed with a terminal illness, the last thing you want to think about is taxes. However, it’s important to understand the tax implications when using a viatical settlement to take cash out of a life insurance policy so you can make an informed decision that’s right for you.
Are viatical settlement proceeds taxed?
Viatical settlements are typically not taxed. The settlement proceeds are considered an advance on the life insurance benefits, which are not taxed. However, there are certain conditions both you and the purchaser must meet in order to maintain tax-free status.
Remember, state laws can also determine whether or not you will be taxed on viatical settlement proceeds. Laws vary from state-to-state and can change each year. Always check your state laws or consult with a professional before making any decisions.
How much are viatical settlements taxed?
If you do not qualify for a tax-free settlement, the amount you are taxed will be determined by why you don’t qualify. If the IRS decides to treat your settlement as a life settlement, you would have to pay taxes on the amount received minus the premium payments made.
It’s important to consider viatical settlement taxation treatment before making any decisions about your life insurance policy. Contact the experts at PolicyBank® and we can walk you through the process.