Both let you sell a life insurance policy. They are regulated by each state’s insurance commission. However, not all states regulate them, and may regulate them differently. The downside of both is that there is little or no death benefit for heirs.

A life settlement company buys policies for cash and gets rights to the death benefit. They become the beneficiary and pay the premiums. They can either keep and maintain the policies to collect the death benefits or sell them to investors who will.

Older people are better candidates. Their shorter life expectancy means the company pays less in premiums before claiming the death benefit. Also, any negative change in health may increase the value.

A good candidate has a life expectancy of under 13 years, and a policy over $100,000. The policy is a good candidate if, relative to its death benefit, the cash or loan value is over 10% and the premium is lower than 4%. (Standard term policies usually don’t qualify.)

You can use the money as you wish. But, because it’s not linked to medical expenses, it may be taxable income and/or subject to capital gains.

Viatical settlements were created to help terminally ill patients.

In a viatical settlement, you sell a policy too, but a viatical company buys it. You must be terminally ill with a life expectancy of 2 year or less to qualify. The viatical company pays a percentage of the death benefit based on your current life expectancy. If your life expectancy is 1-6 months NAIC guidelines calls for paying 80% of the death benefit, That drops to 50% if the terminal illness can go longer than 24 months.

Because the money is from the viatical company for care it’s tax-free.