Chapter 1: An Introduction to Life Settlements
A life settlement, the sale of a life insurance policy for an amount greater than the surrender value but less than the death benefit, can provide significant financial value to policyholders who no longer need or who can no longer afford their policy. This chapter offers a quick history and overview of life settlements.
Life Settlements, Since 1911
A 1911 decision of the US Supreme Court, Grigsby v. Russell, is often referenced as establishing legal basis for the life settlement market. The case revolved around a life insurance policy taken out by John C. Burchard.
In need of a surgical procedure, Mr. Burchard sold the policy for $100 to his physician, Grigsby. When Burchard passed away a year later, Grigbsy’s death benefit claim was challenged by Russell, the executor of the Buchard estate.
The case decision ultimately reached the US Supreme Court which established that a life insurance is private property, and as such can be assigned, or sold.
Judge Oliver Wendell Holmes, who delivered the court’s opinion, stated:
“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.”
This decision was handed down over a century ago. The idea that life insurance is personal property which may be assigned or sold at the will of the owner is well established. Your life insurance policy is a valuable part of your financial plan, and it may be useful well before you pass.
The history of the modern life settlement industry begins with the AIDS crisis in the 1980s. Facing short life expectancies, life insurance policy sales in these circumstances were known as viatical settlements. The term continues to be used for life settlements by those facing chronic or terminal illness and limited life expectancies, typically two years or less.
The industry has expanded since these early years from viatical settlements to what is known today as a life settlement, generally considering individuals aged 70 and older but not terminally or chronically ill.
Purchasers of policies have changed as well. Burchard sold his policy to another individual, his doctor. Today, life settlements are part of an alternative investment asset class known as longevity-linked or insurance-linked assets. The institutional investors of the modern era, for example pension funds or private equity firms, more closely resemble your insurance carrier than they do your doctor.
In addition, regulation has been adopted in most states, with approximately 90% of the population afforded protection under comprehensive laws and regulations when entering into a life settlement transaction. Both the National Council of Insurance Legislators and the National Association of Insurance Commissioners have established model regulation for life settlement transactions, which is the basis for most states’ regulatory scheme.
We can see from the history of life settlements that the need for life insurance coverage can change as personal priorities shift through life. The Supreme Court of the United States established life insurance as personal property which, like any other asset, can be sold. State regulation applies to the vast majority of transactions. Certainly, if a life insurance policy is no longer needed or cannot be afforded, a life settlement is one option policy owner should be aware they can consider.
The Key: A Life Settlement Brings Immediate Cash Value
A life settlement is the sale of an existing life insurance policy to a third party. It is the sale of the life insurance policy contract, including the future premium obligations and death benefit to an institutional investor in exchange for a lump sum of cash, greater than the surrender value but less than the future death benefit. It can be a great alternative to surrendering or lapsing a policy.