Life Settlement History

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Life settlements, as an industry, may be traced back to the 1980’s and the onset of the AIDS epidemic in the United States. In the 1980’s, AIDS victims faced an extremely short life expectancy. Often, these individuals owned life insurance policies they no longer needed. It was under these circumstances that the first viatical settlements occurred. What is a viatical Settlement?

Simply put, a viatical settlement occurs when a terminally or chronically ill individual (less than two years life expectancy) sells his/her life insurance policy to a third party for a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit when the individual expires.

As medical advancements made progress in the lives of those living with AIDS, the Life Settlement Industry emerged. What is a life settlement?

In a life settlement transaction, the policy owner is usually at least 65 and not terminally or chronically ill. Just as in a viatical settlement transaction the individual sells the policy to a third party for a lump sum. Usually, the amount that the individual receives is more than the cash surrender value offered by the life insurance company.

Both types of transactions offer consumers the option of selling their unwanted or unneeded life insurance policy for an immediate cash settlement. So what is the legal basis for these transactions?

The legal basis for viatical and life settlements as a legitimate option for life insurance owners may be found in the early 1900s Supreme Court decision: GRIGSBY v. RUSSELL, 222 U.S. 149 (1911)

In 1911, Dr. A. H. Grigsby treated a patient named John C. Burchard. Mr. Burchard, being in need of a particular surgical operation, offered to sell Dr. Grigsby his life insurance policy in return for $100 and for agreeing to pay the remaining premiums. Dr. Grigsby agreed and so the first viatical settlement transaction was born. When Mr. Burchard passed away about a year later, Dr. Grigsby tried to collect the benefits. An executor of Burchard’s estate, R. L. Russell, challenged him in Appeals Court and won. The case eventually reached the U.S. Supreme Court where Justice Oliver Wendell Holmes Jr. delivered the opinion of the court. The crux of his opinion may be found in this brief excerpt:

“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.” [1]

Justice Holmes’ decision set forth the fundamental principle upon which the viatical settlement and later, the life settlement industry were based: a life insurance policy is private property, which can be assigned at the will of the owner. This principle remained little used for almost eight decades until the onset of the AIDS crisis in the US.

Early improper activities among a few bad actors produced a fear among consumers regarding the viatical settlement option. Life insurers grew and remain concerned about individuals purchasing policies purely for speculative purposes. Today, many states regulate viatical and life settlements and many more are developing legislation and regulation. LISA strongly believes that this concern is best addressed through the transparent development of proper state legislation and regulation. For over a decade, the Life Insurance Settlement Association has worked diligently with policy makers, regulators, the business community and consumers to develop such legislation and regulation. LISA promotes the highest ethical standards and requests that its members uphold these standards and the Association's bylaws. Questions or comments? Email: support@lisa.org.  

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[1] Head, Doug. “Association Profile: Life Insurance Settlement Association”. Agents Sales Journal. March 2006.