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Life Settlement History

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.

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.”

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.



“HOW TO USE LIFESETTLEMENTS”
Senior Market Advisor, August 1, 2009

“Needless to say, seniors are looking for ways to bolster their sagging savings. Often they find that the most valuable asset they can afford to part with is their life insurance policy, which can have substantial cash value. New alternatives have become available for those who no longer have a need for their life insurance policy. One of them is the Life Settlement business, a burgeoning multi-billion dollar industry that has exploded in recent years. Life Settlements can be a worthy alternative for seniors who are considering the sale of their life insurance policy, and offer a higher payment than the cash surrender value offered by the insurance company.”
— Senator Herb Kohl, Special Committee on Aging, April 2009


Growth of the Life Settlement Industry
In the mid-90s the industry recognized the ability for seniors who do not necessarily have terminal illnesses, but in many cases, have significant chronic or degenerative conditions, to benefit from the same type of transaction. This transaction became known as a “Life Settlement” and rapidly gained popularity with investors. While the time frame of a Viatical Settlement could potentially extend far beyond buyer expectations due to misdiagnoses and medical advances, Life Settlements provided a more finite window because, simply stated, there is no cure for old age. Also, Life Settlements were attractive to senior and corporate policy holders for two primary reasons:

  1. Many seniors may need money to meet rising medical costs; and corporations desire to eliminate overhead costs incurred by unwanted “keyman” policies.
  2. More seniors found themselves over-insured due to changes in estate tax laws, while “keyman” policies outlived their usefulness.


In both cases, seniors and corporations found strong motivation to seek life settlement solutions and enjoyed substantial benefit as a result. More than just a better alternative than surrender value, they found Life Settlements to be a good deal.



“WALL STREET PLAYS DEATH CARD IN SECURITIZATION MARKET”
Reuters, July 31 2009

“Selling an unwanted policy increasingly is becoming a financial- management tool for older people who face a cash crunch, who don’t want to rely on their children for financial support or who are trying to find the money for costly long-term insurance”.
— Opdyke, Jeff D.


As the Life Settlement transaction proved to be a true win-win scenario for both buyers and the current policy holders, the market grew to approximately $5 billion by the turn of the century and is now over $20 billion with projections to be many times that in a few short years. With approximately $500 billion of outstanding life insurance on people 65 or older, and with a continuing growing supply coming from the aging baby boomers, the market is poised for continued rapid growth.