Are Viatical Settlements Taxed In New York?

The Short Answer

Federal Rules Drive the Long Answer

For New York residents, the key starting point is federal law. Under Internal Revenue Code §101(g), payments received through a qualifying viatical settlement are excluded from federal gross income if the insured is either terminally ill (life expectancy of 24 months or less, certified by a physician) or chronically ill (meeting the federal definition under §7702B(c)(2)). Because New York Tax Law §612 defines New York adjusted gross income as your federal AGI with limited modifications, amounts excluded at the federal level remain excluded in New York.

Terminally Ill vs. Chronically Ill

• Terminally ill insureds: If certified by a physician as having 24 months or less to live, the entire viatical settlement is excluded from both federal and New York income tax.

• Chronically ill insureds: Exclusions apply only to the extent the proceeds are used to pay for qualified long-term care services, or if structured as per-diem/periodic payments, only up to the IRS annual per-diem cap. See IRS Publication 907 and IRS Form 8853 instructions for details.

The Importance of Licensed Providers

For the exclusion to apply, the settlement must be made through a provider who is licensed in the insured’s state or otherwise meets the requirements set forth by the National Association of Insurance Commissioners (NAIC). In New York, viatical and life settlement companies are regulated under Insurance Law Article 78. Working with a licensed provider not only protects consumers but also ensures the exclusion is valid, preserving the tax-free treatment.

When Proceeds Become Taxable

There are cases where proceeds lose the exclusion:

• Chronically ill insureds exceeding the cap: If per-diem payments exceed the annual IRS cap, the excess is taxable. See IRS per-diem limits for long-term care.

• Unlicensed or non-qualifying providers: If the purchaser is not licensed or does not meet §101(g) requirements, the exclusion fails.

• Non-qualifying insureds: If the insured is not terminally or chronically ill as defined in the Code, the transaction is treated as a life settlement, and gains above the policyholder’s cost basis are taxable. See IRS Notice 2009-47.

Forms and Reporting

Proceeds are generally reported on Form 1099-LTC. If the insured is chronically ill and receives per-diem payments, Form 8853 is used to calculate the exclusion and ensure compliance. New York’s resident return, Form IT-201, does not include any special add-backs for viatical settlements. If the proceeds are excluded federally, they will not appear in New York taxable income.

Examples for New York Residents

• A terminally ill policyholder in New York sells a policy through a licensed viatical settlement provider. The entire amount is excluded from both federal and state income tax.

• A chronically ill policyholder receives per-diem benefits. The portion up to the IRS cap is excluded, while any excess is taxable at both the federal and New York level.

The Importance of Hiring a Viatical Broker in New York

When considering a viatical settlement, New York residents face a highly regulated marketplace. Choosing to work with an independent, licensed life settlement broker in New York City or New York state rather than going directly to a single buyer can make a major financial difference. A broker represents you—the policyholder—and introduces your policy to multiple institutional buyers, creating competition that drives offers higher.

In New York, settlement providers and brokers are regulated under Insurance Law Article 78, which establishes licensing requirements and consumer protections. Working with a licensed professional is essential, because the federal tax exclusion for viatical settlements under IRC §101(g) applies only when the settlement is made through a qualifying provider.

Independent evidence shows the value of competition: the Life Insurance Settlement Association has reported that policies marketed through brokers often receive substantially higher payouts than those sold directly to a single company. Brokers also help evaluate critical policy features—such as premium costs, cash value, and conversion rights—that directly affect your settlement’s value.

Just as importantly, the broker manages the complex process of gathering medical records, preparing paperwork, and ensuring all filings meet New York Department of Financial Services requirements. That administrative support saves time, reduces stress, and helps prevent costly mistakes.

For New Yorkers, the role of the broker is not optional—it’s the safeguard that ensures your transaction is compliant, your interests are protected, and your payout is maximized.

Key Takeaways

If your viatical settlement qualifies under federal §101(g), New York does not tax it. Exceptions arise only when payments exceed federal limits, when the buyer is unlicensed, or when the insured does not meet the statutory definitions of terminally or chronically ill. To protect the exclusion, keep thorough documentation—medical certifications, provider licensing, contracts, and IRS forms.