The life settlement industry is an offshoot of the life insurance industry, which found its legs in the U.S. in the mid-1800s. Back then, life insurance carriers marketed coverage successfully to breadwinning husbands who liked the idea of protecting their families financially after their death. Life insurance as a product continued to gain steam over the next several decades, particularly after World War I. By 1930, there were some $117 billion worth of life insurance policies in force in the U.S.
It was during that growth phase for life insurance that the legal grounds for life settlements were established. A life settlement is the sale of your life insurance to a third party. When you sell your life insurance, a buyer gives you cash in return for all rights to the policy’s death benefit and accumulated cash value. The buyer also assumes responsibility for the policy’s future premium payments.
This transaction is different from surrendering your policy back to the life insurance carrier; when you surrender a policy, that coverage ceases to exist. When you sell in a life settlement, the coverage continues but the death benefit goes to someone else. A surrender also generates less cash than a life settlement. The insurance company will only pay out the policy’s accumulated cash value less any surrender fees — which is usually less than what a third-party would pay to buy that policy.
Grigsby v Russell: The first contested life settlement
In 1911, a man named John C. Burchard needed a medical procedure, but he couldn’t afford to pay his physician, Dr. Grigsby. So Burchard cut a deal with Grigsby: He sold his life insurance policy to the doctor for $100. Grigsby agreed to pay the policy premiums, which were already overdue, and would be entitled to the death benefit when Burchard passed.
Burchard died a year later, but the executor of his estate, R. L. Russell, contested Grigsby’s ownership of the life insurance. The lower courts actually ruled in favor of Russell and the Burchard estate, but Grigsby continued to appeal until the case reached the U.S. Supreme Court. The Supreme Court ruled that life insurance is private property and can be legally assigned by its owner. In other words, Burchard had every right to sell his life insurance and Grigsby had the right to buy it. In the eyes of the law, the sale of the policy was a valid transaction.
Supreme Court Justice Olive Wendell Holmes, Jr., said, “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.”
Although Grigsby v Russell established the legal grounds for life settlements in the early 1900s, few policyholders pursued life settlements in the years that followed. For decades, it seemed that Burchard’s situation was fairly unique. That all changed when the AIDS epidemic came to a head in the 1980s. At that time, less was known about AIDS and there were no effective treatment options. Patients had very short life expectancies, coupled with extremely high medical bills as their providers worked to extend their lives. Those who were covered by life insurance were motivated in a more dramatic fashion than Burchard was back in 1911: Selling their life insurance to generate cash for medical bills was a life-or-death necessity.
That growing need for financial relief among AIDS patients created the viatical settlement industry and laid the groundwork for life settlements at the same time. A viatical settlement is the sale of life insurance to a third party when the insured has a life expectancy of less than two years. Viatical settlements differ from life settlements primarily in the age and health of the insured. A life settlement involves an insured who’s not terminally or chronically ill but is 65 years or older. There is no age requirement for the terminally ill or chronically ill insured to pursue a viatical settlement, however.
The explosion of demand for AIDS-related viatical settlements would later trail off, just as life settlements began to gain popularity.
Health Insurance Portability and Accountability Act (HIPAA)
In 1996, President Bill Clinton signed HIPAA into law. You may know HIPAA as the regulation that covers the handling and privacy of patient medical data, but HIPAA also touched on life insurance. Specifically, HIPAA allows you or your beneficiaries to transfer ownership or the beneficiary designation on your life insurance policy. That reinforces the Grigsby v Russell decision and solidifies the legality of selling your policy in a life settlement.
Life settlements: A regulated industry
Since the 1990s, the life settlement space has evolved into an established, regulated industry. This evolution has largely been due to the passing of state legislation, plus the definition of industry best practices by the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL). In 2000, for example, NCOIL adopted the Life Settlements Model Act. The act defines requirements for the licensing of agents and providers, life settlement contracts, reporting, advertising, and disclosures, among other things. It also outlines prohibited and unfair trade practices. The Life Settlements Model Act was revised in 2004 and again in 2007, but it is still in use today.
Another milestone happened in 2004, when the Viatical and Life Settlement Association of America (VLSAA) changed its name to the Life Insurance Settlement Association of America (LISA). The change reflected the increased interest in life settlements and a corresponding decline in viatical settlements. Several years later, in 2010, NCOIL adopted the Life Insurance Consumer Disclosure Model Act. The act defines the written disclosures that must be provided to senior policyholders who are at risk of letting their life insurance policy lapse. That notice must communicate the alternatives to surrendering the policy, with one of those alternatives being a life settlement.
More recently, in 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. TCJA updated the tax treatment for life settlements to be more favorable for the policyholder.
State law now protects policyholders
Fast forward to today, and LISA has about 90 members, made up of life settlement brokers, providers, investment firms, law firms, medical underwriters, consultants, actuaries, trustees, and escrow agents. The group remains very active in promoting awareness and education about life settlements, as well as maintaining and enforcing a code of ethics among its membership.
Forty-three U.S. states plus Puerto Rico now regulate life settlements or viatical settlements. Those regulations are in place to protect you, the policyholder. According to LISA, transparency is a key theme that underpins state legislation on life settlements around the country. Life settlement companies and providers are required to disclose specific details of your transaction, including all offers received on the policy and what the broker will earn on the sale. You’ll also receive disclosures about alternatives to life settlements and how the transaction might affect your income taxes and your eligibility for needs-based assistance programs like Medicaid.
States also commonly impose a waiting period, which is the length of time you must own the policy before you sell it. In 30 regulating states, the waiting period is two years. Eleven states have a five-year waiting period, and Minnesota has a four-year waiting period. Often, the waiting period can be waived under certain conditions, such as divorce, retirement, or disability.
Interested in a life settlement?
Policyholders like you pursue life settlements for a few different reasons. You may not want your life insurance anymore, because the premiums are burdensome. Your financial or family situation may have changed, and you no longer need to bequeath the death benefit to your beneficiary. Or, more commonly, you may need to raise cash to improve your financial stability or fund healthcare expenses. Perhaps you’ve already looked into surrendering your policy and weren’t impressed with its cash surrender value.
If any of those factors sound familiar, we can help. The Harbor Life team can estimate the market value of your policy for free and without obligation. We’ve been helping people like you get cash from their unwanted or unnecessary life insurance policies for over a decade. Our qualified experts have years of experience finding the right providers willing to pay top-dollar for life insurance — and we know we can do the same for you. At a minimum, we can share our deep industry expertise to answer your questions and help you decide whether a life settlement is right for you.
Contact us by phone at (800) 694-0006 or send an email today for a free consultation. We look forward to speaking with you.
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