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Viatical Settlement

  • 57. What is the income tax treatment of an amount received from a viatical settlement provider?

    • A viatical settlement provider is “any person regularly engaged in the trade or business of purchasing, or taking assignments of, life insurance contracts on the lives of insureds” who are terminally or chronically ill, provided that certain licensing and other requirements are met.1 To be considered a viatical settlement provider a person must be licensed for such purposes in the state in which the insured resides. The IRS has provided guidance on when viatical settlement providers will be considered licensed.2

      If any portion of a death benefit under a life insurance contract on the life of a terminally or chronically ill insured is sold or assigned to a viatical settlement provider, the amount paid for the sale or assignment will be treated as an amount paid under the life insurance contract by reason of the insured’s death.3 In other words, such an amount will not be includable in income (Q 63).4

      A terminally ill individual is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months following the certification.5

      A chronically ill individual is a person who is not terminally ill and who has been certified by a licensed healthcare practitioner as being unable to perform, without substantial assistance, at least two activities of daily living (ADLs) for at least 90 days or a person with a similar level of disability. Further, a person may be considered chronically ill if the person requires substantial supervision to protect himself or herself from threats to his or her health and safety due to severe cognitive impairment and this condition has been certified by a healthcare practitioner within the previous twelve months.6 See Q 477.The activities of daily living are:

      (1)    eating;

      (2)    toileting;

      (3)    transferring (moving oneself from a bed to a chair, to another chair, etc.);

      (4)    bathing;

      (5)    dressing; and

      (6)    continence.7

      If an insured resides in a state that does not require licensing of viatical settlement providers, the insured must meet the standards for either a terminally ill individual or a chronically ill individual.8 The requirements applicable to an insured who is a terminally ill individual are met if the person: (1) meets the requirements of Sections 8 and 9 of the Viatical Settlements Model Act of the NAIC, and (2) meets the requirements of the Model Regulations of the NAIC in determining amounts paid by such person in connection with such purchases or assignments.9 The requirements applicable to an insured who is a chronically ill individual are met if the person: (1) meets requirements similar to the requirements of Sections 8 and 9 of the Viatical Settlements Model Act of the NAIC, and (2) meets the standards of the NAIC for evaluating the reasonableness of amounts paid by such person in connection with such purchases or assignments with respect to chronically ill individuals.10


      Planning Point: The term “viatical settlement” is technical in its definition that viatical settlements refer to only those cases where the insured under the policy is terminally ill. Where the insured is not terminally ill, the terminology of “high net worth transactions” or “senior settlements” may be more appropriate. Transactions involving senior settlements, rather than “viatical settlements” are not necessarily taxed in the same manner.



      1.      IRC § 101(g)(2)(B)(i).

      2.      Rev. Rul. 2002-82, 2002-2 CB 978.

      3.      IRC § 101(g)(2)(A).

      4.      See IRC § 101(a).

      5.      IRC § 101(g)(4)(A).

      6.      IRC §§ 101(g)(4)(B), 7702B(c)(2)(A).

      7.      IRC § 7702B(c)(2)(B).

      8.      IRC § 101(g)(2)(B).

      9.      IRC § 101(g)(2)(B)(ii).

      10.     IRC § 101(g)(2)(B)(iii).

  • 58. Are there special rules regarding the income tax treatment of an amount received by a chronically ill insured from a viatical settlement provider?

    • There are several special rules that apply to chronically ill insureds. Generally, the tax treatment outlined above will not apply to any payment received for any period unless such payment is for costs incurred by the payee (who has not been compensated by insurance or otherwise) for qualified long-term care services provided to the insured for the period. Additionally, the terms of the contract under which such payments are made must comply with:

      (1)    the requirements of IRC Section 7702B(b)(1)(B) (defining “long-term care contract”);

      (2)    the requirements of IRC Sections 7702B(g) and 4980C (Q 477) that the IRS specifies as applying to such a purchase, assignment, or other arrangement (relating to consumer protection provisions);

      (3)    standards adopted by the NAIC that apply specifically to chronically ill insureds (if such standards are adopted, similar standards under number (2) above cease to apply); and

      (4)          standards adopted by the state in which the policyholder resides (if such standards are adopted, the analogous requirements under number (2) and, subject to IRC Section 4980C(f), standards under number (3) above cease to apply).1


      1.      IRC § 101(g)(3)(B).

  • 59. Are there any exceptions to the general rule that viatical settlements are not included as taxable income?

    • There is one exception to this general rule of non-includability for viatical settlements. The rules outlined above do not apply to any amount paid to any taxpayer other than the insured if the taxpayer has an insurable interest in the life of the insured because the insured is a director, officer or employee of the taxpayer or if the insured is financially interested in any trade or business of the taxpayer.1


      1.      IRC § 101(g)(5).

  • 60. What are the new reporting requirements that the 2017 tax reform legislation imposed on taxpayers involved in reportable policy sales of life insurance contracts?

    • Editor’s Note: Upon release of the final regulations, the IRS clarified that no reporting was required under Section 6050Y for reportable policy sales made and reportable death benefits paid after December 31, 2017, and before January 1, 2019.1

      The 2017 tax reform legislation imposes certain reporting requirements when an existing life insurance policy has been sold in a “reportable policy sale”. The requirements apply to anyone who acquires a life insurance contract (or an interest in a life insurance contract) in a reportable policy sale (see below) and any “issuer” of the contract involved (see below). These requirements were to be effective for reportable policy sales made after December 31, 2017 and reportable death benefits paid after December 31, 2017. However, under the final regulations, the IRS and Treasury clarified that the requirements would apply to reportable policy sales and payments of death benefits occurring after December 31, 2018.

      The final regulations also provide an exception from the definition of reportable policy sale with respect to the indirect acquisition of an interest in a life insurance contract by a person if a partnership, trust, or other entity in which an ownership interest is being acquired directly or indirectly holds the interest in the life insurance contract and acquired that interest before January 1, 2019, or acquired that interest in a reportable policy sale reported in compliance with IRC Section 6050Y(a) and Treasury Regulation Section 1.6050Y-2.2


      Planning Point: Forms 1099-LS and 1099-SB now contain instructions regarding these reporting requirements under the regulations, which were finalized late in 2019.3

      Form 1099-LS must be filed by anyone who acquires the life insurance in a reportable policy sale, while Form 1099-SB must be filed by an issuer of the life insurance policy to report information about the seller’s investment in the contract and contract surrender value, in addition to the basic information about the transaction.


      The buyer must report information to the IRS, the seller and the insurance company that issued the policy, including:

      (1)    His or her name, address and TIN,

      (2)    The name, address and TIN of whoever received payment for the interest in the policy,

      (3)    The date of the sale,

      (4)    The name of the policy issuer, and

      (5)    The amount of the payment.4

      When the insurance company receives this notice, it must report the following information to the IRS and the seller:

      (1)    The name, address and TIN of the seller,

      (2)    The basis of the insurance contract, and

      (3)    The policy number.5

      A “reportable policy sale” means a sale where the acquirer has no substantial family, business or financial relationship with the insured (apart from the interest in the life insurance contract). The rules also apply with respect to indirect acquisitions made by way of purchasing an interest in a partnership, trust or other entity that holds an interest in the life insurance contract.6 The final regulations define “issuer” to include anyone that bears any part of the risk associated with the life insurance contract, including those collecting premiums and paying death benefits.7 However, where there are multiple issuers, the reporting obligations are satisfied if only one issuer or designee reports on a timely basis.8

      When a reportable death benefit (a death benefit paid after a reportable policy sale) has been paid, the life insurance company is required to report certain information to the IRS and to the payee, including:

      (1)    The name, address and TIN of the person making the payment,

      (2)    The name, address and TIN of each recipient of payment,

      (3)    The date of each payment,

      (4)    The gross amount of the payment, and

      (5)    The payor’s estimate of the buyer’s basis in the contract.9

      The regulations exclude from certain aspects of the new rules situations where an individual or entity acquires a C corporation that owns life insurance contracts, so long as the life insurance contracts do not represent more than 50 percent of the corporation’s assets. Generally, the new rule created by tax reform would cause certain life insurance contracts to lose their tax-preferred status if transferred in a reportable policy sale (and most business combinations would qualify as such). Accordingly, the acquisition of ownership of a C corporation that owns an interest in a life insurance contract is not an indirect acquisition of such an interest, and therefore is not a reportable policy sale, if no more than 50 percent of the gross value of the assets of the C corporation consists of life insurance contracts. This means that under the regulations, the pre-tax reform exceptions to the transfer for value rule could apply when a C corporation is acquired.10


      1.      Notice 2018-41.

      2.      Treas. Reg. § 1.101-1(c)(2)(iii)(A).

      3.      Notice 2018-41, REG-103083-18.

      4.      IRC § 6050Y(a)(1).

      5.      IRC § 6050Y(b).

      6.      IRC § 6050Y(d)(2).

      7.      Treas. Reg. § 1.6050Y-1(a).

      8.      Treas. Reg. § 1.6050Y-3(b).

      9.      IRC § 6050Y(c).

      10.     Treas. Reg. § 1.101-1(e)(3)(ii).