A viatical settlement can reduce or stop your disability benefits

A viatical settlement is a lump-sum payment you receive when you sell your life insurance policy to a third party. The buyer takes over the premiums and collects the death benefit when you die. If you receive SSDI or SSI, that lump sum counts as income and resources, which means it will affect your benefits in the same way a sudden inheritance or insurance payout would.

The impact depends on which program you receive. SSDI has no resource limit, so the lump sum itself does not cause you to lose benefits. SSI, however, has a strict resource limit of $2,000 for an individual and $3,000 for a couple. A viatical settlement that pushes you over that limit will stop your SSI payments until your resources fall back below the threshold.

Both programs count the money as unearned income in the month you receive it. That income reduces your benefit amount according to a formula: SSA subtracts $65 and then counts half of what remains. For SSDI, the reduction applies only if you are under full retirement age and working. For SSI, the reduction applies regardless of work status.

Key Takeaways

  • SSDI beneficiaries keep their benefits after a viatical settlement because SSDI has no resource limit, though the lump sum counts as income in the month received.
  • SSI beneficiaries will lose benefits if the settlement pushes their total resources above $2,000 (individual) or $3,000 (couple), and benefits stay stopped until resources drop back down.
  • The lump sum counts as unearned income and reduces your benefit check by half of the amount over $65 in the month you receive it.
  • You must report the viatical settlement to Social Security within 10 days of receiving it to avoid overpayment and potential recoupment.
  • Spending down the lump sum quickly on allowed expenses (rent, medical care, food) is the main way SSI beneficiaries can protect their benefits.

How viatical settlements count under SSDI rules

SSDI does not have a resource limit, so receiving a viatical settlement will not cause you to lose your SSDI benefits based on how much money you have. The settlement amount itself does not trigger a benefit termination.

However, the lump sum does count as unearned income in the month you receive it. If you are under full retirement age and working, SSDI applies an earnings test. For 2024, SSDI reduces your benefit by $1 for every $2 you earn above $23,400 per year. A viatical settlement is not earned income, so it does not count toward that $23,400 threshold. The settlement is treated as unearned income, which does not trigger the earnings test reduction.

Once you reach full retirement age, the earnings test no longer applies, and unearned income does not affect your SSDI benefit at all. Your check remains the same regardless of how much money you have or receive.

How viatical settlements count under SSI rules

SSI beneficiaries face a much stricter situation. SSI has both a resource limit and an income limit. The resource limit is $2,000 for an individual and $3,000 for a couple. A viatical settlement lump sum counts as a resource in the month you receive it.

If the settlement pushes your total countable resources above the limit, your SSI benefits stop when ready. You remain ineligible until your resources fall back below the threshold. This means that even if you spend the money quickly, SSI will not resume until the month after your resources drop below the limit and you report the change to Social Security.

The lump sum also counts as unearned income. SSA applies the unearned income reduction formula: subtract $65, then count half of the remainder. For example, a $10,000 viatical settlement would reduce your SSI check by $4,967.50 in the month received (half of $10,000 minus $65 equals $4,967.50). If your SSI check is smaller than that reduction, your benefit for that month is $0.

Reporting requirements and timing

You must report a viatical settlement to Social Security within 10 days of receiving the money. Call your local Social Security office or report it online through your my Social Security account. Failing to report creates an overpayment: SSA will have paid you benefits you were not may have access to to, and you will owe that money back.

The timing of when you receive the settlement matters. If you receive it on the first of the month, it counts as income and a resource for that entire month. If you receive it on the 15th, it still counts for the full month. SSA does not prorate based on the day received.

After you report, SSA will send you a notice explaining how the settlement affects your benefits. For SSDI, the notice will show the income reduction for that month only. For SSI, the notice will explain both the resource disqualification and the income reduction. Keep this notice for your records.

Strategies for SSI beneficiaries to protect benefits

If you receive SSI and are considering a viatical settlement, the key is to spend the money quickly on allowed expenses before it counts as a resource. SSI does not count money you spend on food, shelter, utilities, medical care, transportation, or other living expenses. Once the money is spent, it no longer counts toward your resource limit.

Plan your spending in advance. Pay off medical bills, make home repairs, buy necessary equipment, or pay several months of rent upfront. These are all allowed uses that reduce your countable resources. Do not straightforward hold the money in a bank account, because that will trigger the resource limit and stop your benefits.

Some SSI beneficiaries use a ABLE account (Achieving a Better Life Experience account) to hold settlement money without it counting as a resource. ABLE accounts allow you to save up to $100,000 without losing SSI may be able to access. However, you must have become disabled before age 26 to open an ABLE account, and the account must be in your name alone. If you are may be able to access, this can be a way to preserve the settlement money while keeping your SSI benefits.

Consult with a Social Security representative or a disability advocate before you accept a viatical settlement. They can help you understand the exact impact on your specific benefits and plan the timing and use of the money.

The difference between viatical and life settlements

A life settlement is similar to a viatical settlement but applies to people with a longer life expectancy. With a viatical settlement, the seller typically has a terminal illness and a life expectancy of two years or less. With a life settlement, the seller is older but not necessarily terminally ill. Both types of settlements are treated the same way by Social Security: the lump sum counts as income and a resource.

The rules do not distinguish between the two. Whether you sell a policy because you have a terminal diagnosis or because you are elderly and no longer need the coverage, SSA treats the payment identically for benefit calculation purposes.

What happens if you do not report the settlement

If you receive a viatical settlement and do not report it to Social Security, SSA will eventually discover it. Banks report large deposits to the IRS, and SSA cross-matches records. When SSA finds out, it will calculate an overpayment for all the months you received benefits you were not may have access to to.

You will be required to repay the overpayment in full. SSA can recover it by reducing your future benefit checks, taking tax refunds, or pursuing other collection methods. For SSI beneficiaries, an overpayment can also result in a period of ineligibility even after the money is repaid.

Reporting the settlement when ready protects you from this situation. It also ensures that your benefit amount is calculated correctly going forward.

Frequently Asked Questions

Will I lose my SSDI if I get a viatical settlement?

No. SSDI has no resource limit, so the lump sum will not cause you to lose benefits. The money counts as unearned income in the month you receive it, but that only affects your check if you are under full retirement age and working. Once you reach full retirement age, unearned income does not reduce SSDI at all.

Can I use a viatical settlement to pay off debt without losing SSI?

Paying off debt does not reduce your countable resources because the debt payment is not a "use" that SSI recognizes. The money still counts as a resource when you receive it. You must spend the settlement on living expenses like food, rent, medical care, or utilities to reduce your resource count before SSI counts it.

What if I receive the viatical settlement in installments instead of a lump sum?

Each installment counts as unearned income in the month you receive it. If the installments are structured as a periodic payment (like an annuity), SSA may count only the portion received that month as income, not the full settlement value. Ask the settlement company how the payments will be structured and report that structure to Social Security.

Can I put a viatical settlement into a trust to protect my SSI?

Putting the money into a trust you control does not remove it from your countable resources. SSA counts the trust assets as your resources if you can access them. A properly structured special needs trust (created and funded by someone else, not you) might protect the money, but you cannot create or fund it yourself with the settlement proceeds.

How long do I have to spend down the settlement before SSI counts it?

You must spend it before the end of the month you receive it. Any money remaining in your account at the end of that month counts as a resource starting the next month. If it pushes you over the limit, your SSI stops. There is no grace period.