“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.” – Justice Oliver Wendell Holmes, Jr.
In 1911, The Supreme Court case of Grigsby v. Russell established the policy owner’s right to transfer an insurance policy. Dr. Grigsby had treated a patient named John C. Burchard, who needed a surgery he could not afford. Mr. Burchard offered to sell Dr. Grigsby his life insurance policy in return for $100 and his agreement to pay the remaining premiums. Dr. Grigsby agreed, but when Mr. Burchard passed away about a year later, his claim to the benefits was challenged by R. L. Russell, an executor of Buchard’s estate. Russell won in Appeals Court, and eventually, the case reached the U.S. Supreme Court where Justice Oliver Wendell Holmes, Jr. delivered the opinion, encapsulated above.
The ruling placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks, bonds, or real estate. As with other types of property, a life insurance policy could be transferred to another person. The policy owner could, at their discretion:
- Name or change the policy beneficiary.
- Assign the policy as collateral for a loan.
- Borrow against the policy.
- Sell the policy to another party.
In spite of this ruling, the practice of selling life insurance policies remained little used until the 1980’s AIDS epidemic in the United States. At that time, viatical settlements starting occurring on a regular basis. A viatical settlement occurs when a terminally or chronically ill person (generally with a life expectancy of two years or less) sells his or her life insurance policy to a third party for a lump sum. The third party becomes the new owner of the policy, pays the premiums, and receives the death benefit when the insured individual passes away.
Life Settlements work in the same way, except that the policyholder is typically over 65 (often in their 80’s or approaching life expectancy). Also called Senior Settlements, those seeking Life Settlements are not necessarily terminally ill. However, a chronic illness may be the impetus for the senior to seek a Life Settlement, as they can often use the extra right away for medical treatments or to improve their quality of life in their last years.
In 2001, The National Association of Insurance Commissioners (NAIC) released the Viatical Settlements Model Act which defined guidelines for sound business practices. This established regulations around this new industry and sought to protect policyholders and purchasers alike from fraud or abuse. The demand for Life Settlements has led the great majority of states to put regulations in place regarding the sale of life insurance policies to third parties. And for over a decade, the Life Insurance Settlement Association has worked with policy makers, regulators, the business community and consumers to develop such legislation and regulation.
Thus Life Settlements became a defined asset class, and many of the now-prominent Life Settlement Providers began purchasing policies for their investment portfolio using institutional capital. Very quickly, well-funded corporate entities transformed the settlement concept into a regulated wealth management tool utilized by high-net-worth policy owners who no longer needed a given policy, and by savvy investors seeking healthy market returns shielded from market whims.
Strong demand for Life Settlements policies continues to drive rapid market expansion that continues today. In 2008 alone, it was estimated that existing policies with a collective face value of $11.8 billion were sold by policyholders to investors.
Life Investments are an investing strategy that we recommend to appropriate investors seeking safe, reliable, well-performing investment alternatives to the stock market. For an overview of recommended strategies, see our most recent post, “Investing Outside the Box: Alternative Investments,”
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