Life insurance • Policy options
Viatical Settlements: Selling a Life Insurance Policy When You’re Seriously Ill
A viatical settlement is the sale of a life insurance policy by someone who is terminally or chronically ill. A licensed provider pays a lump sum, takes over the premiums, and collects the death benefit later. The money can pay for care or living costs, and in many cases it is not taxed. Before selling, compare it with accelerated death benefits that your policy may already include.
This guide explains how viatical settlements work, federal tax rules, Arizona protections, and alternatives.
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How a viatical settlement differs from a life settlement
Both are sales of a policy to a provider. A viatical settlement involves an insured who is terminally ill, meaning an illness expected to result in death within 24 months, or chronically ill, meaning unable to do at least two activities of daily living or needing substantial supervision for severe cognitive impairment (A.R.S. § 20-3201). Arizona regulates both under its life settlement law. In Arizona, terminal illness is an exception to the rule against settling a policy within two years of issue (A.R.S. § 20-3211). See life settlements.
How the process works
- You or a broker send the policy details and medical records to providers.
- Providers estimate life expectancy and make offers.
- You review the required disclosures and sign the contract.
- The provider places the money in escrow, the insurer records the new owner and beneficiary, and you’re paid within three business days of that acknowledgment in Arizona.
Viatical settlements became widespread in the late 1980s and 1990s during the AIDS epidemic. Today they are more often used with advanced cancer, ALS, and other serious illnesses.
Federal tax treatment
Amounts received from a qualified viatical settlement provider for the policy of a terminally ill insured are generally treated like a death benefit and excluded from income. For a chronically ill insured, the exclusion generally applies only to amounts used for qualified long-term care costs, subject to limits (26 U.S.C. § 101(g)). Talk with a tax adviser before you sell.
Chronic illness: the 2026 per diem limit
For a chronically ill insured, tax-free treatment is generally limited to amounts used for qualified long-term care costs. Payments made on a per diem basis are generally excluded up to an annual limit, which is $430 a day for 2026 (LTC News, citing IRS Rev. Proc. 2025-32), or about $156,950 for a full year. Amounts above the limit that exceed your actual care costs may be taxable.
Accelerated benefits vs. viatical settlement vs. policy loan
| Option | Who pays | What’s left for heirs |
|---|---|---|
| Accelerated death benefit | Your insurer, from the policy | The remaining death benefit, minus any fees |
| Viatical settlement | A licensed provider | Usually nothing |
| Policy loan | Your insurer, against cash value | Death benefit minus the loan and interest |
Ask your insurer for an accelerated benefit quote before you get viatical offers, so you can compare what you’d receive and what your family would keep.
Protections and things to check
- Arizona providers must disclose alternatives, tax effects, and possible effects on public benefits such as Medicaid or SSI (A.R.S. § 20-3204).
- Arizona gives you 15 days to cancel after signing and receiving disclosures (A.R.S. § 20-3211).
- Get offers from more than one provider, and ask a broker to show you its compensation.
- The provider will need access to your medical records and may contact you about your health status.
Public benefits and creditors
A lump sum can count as income or an asset for programs like Medicaid and SSI, and may be reachable by creditors. Arizona providers must tell you about these risks in writing (A.R.S. § 20-3204). Ask the benefits agency, or an elder law or special needs attorney, how a payment would affect you before you sign.
Alternatives to consider
- Accelerated death benefits: many policies let a terminally or chronically ill insured take part of the death benefit early; see life insurance riders.
- Policy loan or cash value: for permanent policies; see cash value life insurance.
- Waiver of premium: check whether your policy stops premiums if you’re disabled.
- Family help: a family member could take over premiums in exchange for being named beneficiary.
Viatical settlement FAQs
What is a viatical settlement?
The sale of a life insurance policy by a terminally or chronically ill insured to a licensed provider for a lump sum.
Is a viatical settlement taxable?
For a terminally ill insured, the payment is generally tax-free. For chronic illness, the exclusion is generally limited to qualified long-term care costs.
What’s the difference between a viatical and a life settlement?
A viatical settlement involves a seriously ill insured; a life settlement usually involves older insureds without a terminal illness.
Can a viatical settlement affect Medicaid?
It can, because the cash may count as an asset or income. Ask the agency before you sell.
How much does a viatical settlement pay?
It depends on life expectancy, the death benefit, and premiums; get offers from more than one provider.
Do I need a broker?
Not always, but a broker represents you, can collect multiple offers, and must disclose its compensation in Arizona.
Is an accelerated death benefit better than a viatical settlement?
It depends. An accelerated benefit leaves part of the death benefit for your family; a settlement may pay more but usually leaves nothing.
Related guides
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Not tax or legal advice. Tax and insurance rules summarized here are general information as of November 2026 and can change. Talk with a tax professional or attorney about your situation.
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