Table of Contents

Understanding Viatical Settlements: Definition, Process, and Risks

By

Julia Kagan

Updated December 25, 2025

Reviewed by

Marguerita Cheng

Key Takeaways

A viatical settlement provides a lump sum cash payout in exchange for selling your life insurance policy during a terminal illness.
These settlements are risky for investors as the return depends on the seller's lifespan.
Viatical settlements allow terminally ill policyholders to access immediate funds for care and preserve other assets.
Life settlements differ from viatical settlements; they are for policyholders with a life expectancy greater than two years.
Before selling a life insurance policy, consider alternatives like accelerated death benefits or loans against the policy's cash value.

What Is a Viatical Settlement?

A viatical settlement is when someone who is terminally or chronically ill sells a life insurance policy for immediate cash at less than face value, giving up the death benefit for their chosen beneficiary. This buyer pays a lump sum, takes over premiums, becomes the beneficiary, and collects when the insured dies, but returns are uncertain because timing is unknown. Unlike a life settlement, it's tied to serious illness.

Exploring the Mechanics of Viatical Settlements

Viatical settlements enable owners of life insurance policies to sell their policies to investors. Investors buy the full policy or a portion of it at a cost that is less than the policy's death benefit. The investor's rate of return depends upon when the seller dies. The rate of return will be lower if the seller outlives their estimated life expectancy. Conversely, the rate of return will be greater if the seller dies sooner than estimated.

For someone who is terminally ill, a viatical settlement enables them to obtain immediate cash they can use to pay for their care and comfort in their final days. A viatical settlement can be a financial management tool that enables individuals to preserve their estate's other assets—such as a home—which they may not want to sell before their death.

Risks and Criticisms Surrounding Viatical Settlements

From an investment perspective, a viatical settlement can be extremely risky. The rate of return is unknown because it's impossible to know when someone will die. If you invest in a viatical settlement, you are speculating on death. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money (TVM), the longer the person lives, the lower your rate of return.

Important

In many states in the U.S., companies that buy viatical settlements to sell to investors are licensed by state insurance commissioners. For more information and a list of state insurance regulators, visit the National Association of Insurance Commissioners (NAIC).

Comparing Viatical and Life Settlements

Individuals not facing a health crisis may also choose to sell their life insurance policies to get cash, which is more typically referred to as a life settlement. A life settlement differs from a viatical settlement in that the insured has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is generally two years or less.

If a life insurance policyholder is considering a life settlement, they should first consider all available options for obtaining the needed cash. There might be a better way to utilize a life insurance policy.

For instance, a life insurance policyholder may be able to access some of the cash value to meet their immediate needs while keeping the policy in force for beneficiaries. It might also be possible to use the cash value as security for a loan from a financial institution.

An accelerated death benefit (ADB) is also an option. An accelerated death benefit usually pays some of a policy’s death benefit before the insured dies. This could provide the holder of the life insurance policy with the cash needed without having to sell the policy to a third party.

Important Considerations for Viatical and Life Settlements

There are various points to consider before deciding on either a viatical settlement or a life settlement:

It's important to get quotes from several companies to ensure a competitive offer.
Request an in-force illustration or reprojection for your current policy.
Not all proceeds received from the sale of a life insurance policy may be tax-free; make sure you understand all tax implications before entering a contract.
Find out if any creditors could claim your cash settlement.
Understand the implications of any public assistance that may be relevant, such as the Supplemental Nutrition Assistance Program (SNAP) or Medicaid.
The buyer of a viatical settlement is allowed to check on your health condition periodically. Make sure you understand who will get access to this information.
All questions on an application form must be answered truthfully and completely—especially questions about medical history.
Make sure the viatical settlement provider deposits funds into an independent escrow account to protect the funds during the transfer.
Find out if returning the money is an option in the event of seller's remorse.

The Bottom Line

A viatical settlement sells a life insurance policy for immediate cash below face value, with risk because returns depend on life expectancy. It's often tied to about two years or less, unlike life settlements with longer timelines. Compare multiple offers and consider taxes, creditor claims, public-assistance impacts, and professional guidance before proceeding.