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