The short answer.
Usually, no.
If a viatical settlement meets the federal §101(g) rules, meaning the insured is terminally or chronically ill and the buyer is a licensed viatical settlement provider, the money is excluded from federal income. New York starts from federal adjusted gross income, and the state has no add-back for viatical proceeds. Amounts excluded federally are not taxed by New York State or New York City.
Federal law decides it.
Under Internal Revenue Code §101(g), payments from a qualifying viatical settlement are excluded from federal gross income when the insured is terminally ill, defined as a life expectancy of 24 months or less certified by a physician, or chronically ill under the definition in §7702B(c)(2).
New York Tax Law §612 defines New York adjusted gross income as federal AGI with limited modifications. Nothing in those modifications reaches viatical proceeds, so what is excluded federally stays excluded in New York.
Terminally ill and chronically ill are treated differently.
Terminally ill insureds: with a physician’s certification of 24 months or less, the entire settlement is excluded from both federal and New York income tax.
Chronically ill insureds: the exclusion covers proceeds used to pay for qualified long-term care services. For per-diem or periodic payments, the exclusion runs only up to the annual IRS cap. See IRS Publication 907 and the Form 8853 instructions.
The buyer has to be licensed.
The exclusion depends on who buys the policy. The settlement must go through a provider licensed in the insured’s state, or one that otherwise meets the standards set by the National Association of Insurance Commissioners. In New York, viatical and life settlement companies are regulated under Insurance Law Article 78.
An unlicensed buyer costs a seller the tax treatment along with the consumer protections.
When proceeds become taxable.
Per-diem payments above the cap. A chronically ill insured receiving more than the annual IRS limit owes tax on the excess. See IRS Topic 354.
An unlicensed or non-qualifying buyer. The exclusion fails outright.
An insured who is neither terminally nor chronically ill under the Code. The transaction is treated as a life settlement, and gain above the policyowner’s cost basis is taxable. See IRS Notice 2009-47.
Forms and reporting.
Proceeds are generally reported on Form 1099-LTC. A chronically ill insured receiving per-diem payments uses Form 8853 to calculate the exclusion.
New York’s resident return, Form IT-201, carries no special add-back for viatical settlements. Proceeds excluded federally never appear in New York taxable income.
Two New York examples.
A terminally ill policyowner in New York sells through a licensed viatical settlement provider. The entire amount is excluded from federal and state income tax.
A chronically ill policyowner receives per-diem benefits. The portion up to the IRS cap is excluded. Anything above it is taxable federally and in New York.
The role of a broker in a New York viatical settlement.
New York runs one of the most heavily regulated settlement markets in the country, and the licensing requirement is not only a consumer protection. Because the §101(g) exclusion depends on a qualifying provider, who buys the policy determines whether the proceeds are taxed.
A broker and a provider are not the same thing. A broker represents the policyowner as a fiduciary. A provider represents its own capital and owes the seller no fiduciary duty. A provider makes one offer. A broker takes the policy to multiple buyers and reports every bid received.
Competition moves the number. A U.S. Government Accountability Office study of settled policies found that sellers received roughly four to seven times more from a settlement than from surrendering the policy to the carrier.
The administrative side sets the timeline. Gathering medical records, preparing paperwork, and meeting New York Department of Financial Services filing requirements is slow work, and errors restart it. A broker manages that process on behalf of the policyowner.
Windsor works with policyowners across New York State and in New York City. More on how brokers are paid sits on the viatical settlement brokers page.
Key takeaways.
A viatical settlement that qualifies under federal §101(g) is not taxed by New York. The exclusion fails in three situations: payments above the federal per diem limit, an unlicensed buyer, or an insured who does not meet the statutory definition of terminally or chronically ill.
Documentation protects the exclusion. Medical certifications, proof of provider licensing, the settlement contract, and the IRS forms should all be kept.
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