What is a life settlement?
A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit. A policy owner receives a cash payment, while the purchaser of the policy assumes all future premium payments and receives the death benefit upon the death of the insured.
Candidates for life settlements are typically 65 or older and own a life insurance policy with a face amount in excess of $100,000.
Did you know?
Prior to the existence of the Life Settlement Market, policy owners received little, if any, economic value from policies they no longer wanted, needed or could afford.
In fact, even today, it is estimated that more than 90% of life insurance policies lapse due to consumer’s lack of awareness of the life settlement market.
Many seniors hold policies that are worth more than their cash surrender value and they don’t even know it.
Similar to other assets, the secondary market for life insurance provides liquidity. This liquidity component adds value to the life insurance policies that a consumer owns.
In 1911, the U.S. Supreme Court, issued a landmark decision in the case of Grisby vs. Russell, which recognized the rights of the life insurance policyowners to transfer ownership of their life insurance policies to a third party, who happened to be unrelated to the policy owner or insured and who did not hold an insurable interest in the policy owner or insured.
This landmark ruling paved the way for the birth of the life settlement industry in the United States. The Grigsby Court upheld a policy owner’s right to assign his/her life insurance policy. In Grigsby, the Court heard a case that involved a patient of Dr. Grigsby’s who needed surgery but had no money to pay for the surgery. The patient agreed to sell Doctor Grigsby his life insurance policy for $100 in exchange for the surgery. Doctor Grigsby subsequently took ownership of the policy and continued to pay the policy’s premiums until his patient’s death a year later. When Doctor Grigsby attempted to collect the death benefit, the patient’s estate refused to recognize the assignment and litigation ensued. The executor of the patient’s estate challenged the transfer as being void against public policy (as a wager on life – in prior U.S. Supreme Court decisions, life insurance policies could only be assigned to cover debts and only up to the amount of the debt; anything over that amount was considered a wager and against public policy) since Dr. Grigsby did not have an insurable interest in the patient’s life. The case eventually wound up before the U.S. Supreme Court where famed jurist Justice Oliver Wendell Holmes, Jr. issued the opinion that upheld a policyowner’s – in this case, Dr. Grigsby – right of assignment.