What are the tax consequences of accelerated death benefits or viatical settlements?
A. Effective January 1, 1997, if certain requirements are satisfied, accelerated death benefits received from the insurer under life insurance contracts on the life of a terminally ill or chronically ill individual may be received free of income taxes. Similarly, if all or a portion of a life insurance contract is sold to a third party investor (this process is called a “viatical settlement”), amounts received from the third party may be excluded from gross income. Consequently, an individual diagnosed with a fatal or long term illness may obtain the proceeds of a life insurance contract from the insurer or assign the benefits of a life insurance contract over to a viatical settlement company without paying tax on the proceeds. There previously was some uncertainty about the taxability of accelerated death and viatical settlement benefits. In order to receive these favorable tax benefits, however, the individual must meet certain requirements. Q.
