Life settlement

A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. There are a number of reasons that a policy owner may choose to sell his or her life insurance policy. The policy owner may no longer need or want his or her policy, he or she may wish to purchase a different kind of life insurance policy, or premium payments may no longer be affordable. Policy owners often learn about settling their policies from a financial planner or advisor, insurance broker, attorney, friends or family, or estate planning presentations.

Viatical settlements are similar but not the same as life settlements. For a viatical settlement, a person who is selling his policy (viator) is terminally or chronically ill.

Although the secondary market for life insurance is relatively new, the market was more than 100 years in the making. The life settlement market would not have originated without a number of events, judicial rulings and key individuals.

The U.S. Supreme Court case of Grigsby v. Russell, 222 U.S. 149 (1911) established a life insurance policy as private property, which may be assigned at the will of the owner. Justice Oliver Wendell Holmes noted in his opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner may transfer without limitation. Wrote Holmes, “Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.” This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property, such as and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner.

This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to:

In the 1980s, the U.S. faced an AIDS epidemic. AIDS victims faced short life expectancies, and they often owned life insurance policies that they no longer needed. As a result, the viatical settlement industry emerged. A viatical settlement involves a terminally or chronically ill person (with less than two years life expectancy) who sells his or her existing 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 full death benefit when the insured dies. Because of medical advancements, people with AIDS started living longer and therefore viatical settlements became less profitable. As a result, the life settlement industry arose.

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Wikipedia