Viatical Settlement Taxes

When Taxes Might Apply

Although most viatical settlements qualify for tax exemption, there are exceptions.
If a policyholder does not meet the federal definition of terminally or chronically ill, or if the settlement is made through an unlicensed provider, the transaction may be treated as a life settlement, which is subject to different tax rules.

In those situations, a portion of the proceeds—typically the amount received above the total premiums paid—could be taxable as capital gain or ordinary income.

Because state tax treatment can differ from federal law, and because each individual’s financial situation is unique, Windsor strongly encourages every policyholder to speak with a qualified tax professional before completing a transaction.

Why Licensing Matters

To qualify for favorable tax treatment, the buyer or provider must be properly licensed in the state where the policyholder resides. The IRS specifically recognizes viatical settlements arranged through licensed providers and brokers as legitimate, tax-exempt transactions.

Windsor Life Settlements works only with licensed institutional buyers in fully regulated states, ensuring that every transaction meets both state and federal standards for compliance. This not only protects your privacy and security but also preserves your eligibility for tax-free treatment.

State Tax Considerations

While the IRS provides the general framework for exemption, some states have their own reporting or documentation requirements. These may include filing forms or providing proof of medical certification at the time of settlement.

Windsor can help you identify whether your state requires any additional documentation and coordinate with your licensed tax advisor to make sure all requirements are met.

Key Takeaway

Most people who qualify medically for a viatical settlement will not owe taxes on the money they receive. When arranged properly through a licensed broker and provider, the transaction is treated by law as an advance of your life insurance benefit—not income.

Windsor’s role is to ensure your settlement follows all necessary guidelines so you can access your funds confidently, without surprises or tax complications later.

A Note on Professional Advice

Windsor Life Settlements is not a tax advisor. The information provided here is general in nature and should not be relied upon as legal or financial advice. Before selling your life insurance policy, please consult with a qualified tax professional to understand how federal and state laws apply to your individual circumstances.