rr-02-82.pdf

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Part I

Section 101.–Certain Death Benefits

Rev. Rul. 2002-82

ISSUE
Under what circumstances will a viatical settlement provider be treated as
licensed by a State for purposes of § 101(g)(2)(B) of the Internal Revenue Code?
FACTS
Buyer is a person regularly engaged in the trade or business of purchasing, or
taking assignments of, life insurance contracts on the lives of insureds who are either
terminally or chronically ill (a viatical settlement provider). Buyer purchases, or takes
assignments of, life insurance contracts from persons residing in States that have
enacted legislation requiring the licensing of viatical settlement providers and in States
that have no statute requiring licensing.
Not all States that require licensing for viatical settlement providers have fully
implemented their licensing procedures. In State A, the appropriate regulatory authority
has issued a letter to Buyer granting temporary authority to engage in the business of
purchasing, or taking assignments of, life insurance contracts on the lives of residents
of State A while Buyer’s application for a license is pending. If State A decides not to
issue a license to Buyer, State A will revoke its temporary authority to Buyer.
In State B, the licensing statute is effective, but a procedure is not yet in place for
licensing providers. However, the appropriate regulatory authorities of State B have

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issued a public notice that authorizes all viatical settlement providers to engage in
business in State B until further guidance is issued.
In State C, the licensing statute is effective but a procedure is not yet in place for
licensing providers, nor has the appropriate regulatory authority granted permission,
even temporarily, for providers to engage in business in State C until licensing
procedures are in place.
LAW AND ANALYSIS
Section 101(a)(1) excludes from gross income amounts received under a life
insurance contract by reason of the death of the insured. If the insured is either
terminally or chronically ill, amounts received under the life insurance contract (whether
or not the recipient is also the insured) may be treated under § 101(g) as amounts
received by reason of the death of the insured and excluded from gross income. For
this purpose, terminally ill individuals are defined under § 101(g)(4)(A), and chronically
ill individuals are defined under § 101(g)(4)(B). The exclusion is unlimited in amount for
contracts insuring terminally ill individuals, but under § 101(g)(3) the exclusion but is
limited for insureds who are chronically ill.
If the person making the payments to the owner of the life insurance contract is
the issuing insurance company, the availability of the exclusion depends solely upon
whether the insured meets the definition of either a terminally or chronically ill person. If
a life insurance contract insuring a terminally or chronically ill individual is sold or
assigned, however, the buyer/assignee must qualify as a viatical settlement provider

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under § 101(g)(2)(B) in order for the owner of the life insurance contract to exclude all or
a portion of the amounts received from the sale or assignment.
Section 101(g)(2)(B)(I) defines a viatical settlement provider as 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, and
such person satisfies one of two alternative tests. If the insured resides in a State that
requires licensing of viatical settlement providers with respect to the insured, the
buyer/assignee must be so licensed. Section 101(g)(2)(B)(i)(I). In some States that
require licensing, the licensing program may not be fully operational immediately upon
the effective date of the implementing statute.
If the insured resides in a State not requiring the licensing of viatical settlement
providers with respect to the insured, the buyer/assignee must meet the requirements
set forth by the National Association of Insurance Commissioners (NAIC) in the Viatical
Settlements Model Act and the Model Regulations or other NAIC requirements for
evaluating the reasonableness of amounts paid by such persons in connection with
purchases or assignments with respect to such insureds. Sections 101(g)(2)(B)(i)(II)
and 101(g)(2)(B)(ii) and (iii). The Model Act, Model Regulations, and other NAIC
standards applicable to viatical settlement providers are comprehensive and complex,
and are subject to periodic examination by the NAIC for possible modification or
expansion.
For purposes of § 101(g)(2)(B)(i)(I), if the regulatory authority in a State that
requires licensing establishes an interim program granting temporary authority to

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particular viatical settlement providers or blanket authority for all viatical settlement
providers to conduct business pending implementation of its licensing program,
authorized providers will be treated as licensed in that State.
Conversely, if a State enacts a licensing requirement and the appropriate
regulatory authorities of the State do not permit viatical settlement providers to engage
in business in that State (either under temporary authority to particular viatical
settlement providers or blanket authority to all viatical settlement providers) until
licenses are actually granted, providers that nevertheless engage in business in that
State will not be treated as licensed for purposes of § 101(g)(2)(B)(i)(I). In such a
State, a viatical settlement provider may not rely on the NAIC Model Law or Model
Regulations to satisfy the requirements set forth in § 101(g)(2)(B)(i)(II). Accordingly, no
exclusion is available for proceeds from the sale or assignment of life insurance
contracts insuring the lives of terminally or chronically ill insureds residing in that State
until that State actually grants licenses.
HOLDING
Buyer is treated as licensed for purposes of § 101(g)(2)(B)(i)(I) in State A (where
temporary authority has been granted to Buyer to engage in business while State A
reviews Buyer’s pending licensing application) and in State B (where blanket authority
to engage in business has been granted to all viatical settlement providers by State B,
pending further guidance).
Buyer is not treated as licensed for purposes of § 101(g)(2)(B)(i)(I) in State C.
Further, Buyer may not qualify as a viatical settlement provider in State C under §

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101(g)(2)(B)(i)(II). Therefore, sellers or assignors residing in State C may not exclude
under § 101(a) any portion of the amount received from Buyer. Buyer's failure to qualify
as a licensed provider in State C does not affect whether Buyer qualifies as licensed in
any other state.
EFFECTIVE DATE
This revenue ruling is effective for all amounts received on or after January 1,
1997, the effective date of § 101(g). However, amounts received pursuant to sales or
assignments entered into before [date of publication plus 180 days] by residents of any
State that requires licensing of viatical settlement providers but has neither issued
temporary authority to particular viatical settlement providers nor blanket authority to all
viatical settlement providers that are not yet individually licensed will be treated as
received from a viatical settlement provider if, at the time of the sale or assignment, the
viatical settlement provider satisfied the requirements of § 101(g)(2)(B)(i)(II).
DRAFTING INFORMATION
The principal author of this revenue ruling is Ann H. Logan of the Office of
Associate Chief Counsel (Financial Institutions and Products). For further information
regarding this revenue ruling contact her at (202) 622-3970 (not a toll-free call).