Thanks to immunotherapy, I’m now in remission, but a year ago I was battling Stage 4 throat cancer. I sold my life insurance policies to a third party for 33 cents and 50 cents on the dollar to pay overwhelming bills and put money in bank accounts for my wife and son. Will I be hit with a tax bill?

That depends on your medical condition when you sold your policies, and on whether the purchaser meets the Internal Revenue Service definition of a viatical settlement provider — a person or company regularly engaged in buying life insurance policies from people terminally or chronically ill.

You should calculate your tax liability on Form 8853, says Alan E. Weiner, a Melville tax accountant. Even if it shows you have zero liability, he recommends filing Form 8853 with your tax return.

A viatical settlement is generally tax-free if the person selling the policy is terminally ill and the buyer is a viatical settlement provider. The IRS deems you terminally ill if a doctor certifies your illness can reasonably be expected to result in death within 24 months from the date of the certification.

You can claim a tax exclusion of up to $360 a day on your settlement if you’re chronically ill and the buyer is a bona fide viatical provider. The IRS deems you chronically ill if a licensed health care practitioner has certified within the previous 12 months that you’ve been unable to perform at least two activities of daily living without substantial help for a period of 90 days or more, or that you require substantial supervision to protect your health and safety due to severe cognitive impairment.


The tax treatment of your settlement depends on your medical condition and the provider’s credentials.