History of Life Settlements
A life insurance settlement is when a life insurance policyholder decides to sell all or part of their policy for a cash payment. Although unknown to many people, such transactions have been available for more than a century. In this article, we’ll review a brief history of life settlements.
1911 Grigsby vs Russell Case
In 1911, Grigsby vs Russell defined the case law surrounding the sale of life insurance policies.
John C. Burchard had bought a life insurance policy and made two premium payments, but the third payment was overdue. When Burchard fell ill and needed surgery, he decided to sell his policy to his doctor, Dr. A.H. Grigsby. Dr. Grigsby agreed to purchase the policy for $100, become the assigned beneficiary, and continue to make premium payments to keep the policy in force until Mr. Burchard’s passing.
However, the sale of Mr. Burchard’s policy was annulled by the local court & the circuit of appeals based on the nature of the sale. The case escalated to the U.S. Supreme Court, where the Court’s opinion was delivered by Justice Oliver Wendell Holmes Jr., approving the sale of the life insurance policy.
From Justice Holmes: “On the other hand, life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property“
“This is recognized by the Bankruptcy Law, § 70, which provides that, unless the cash surrender value of a policy like the one before us is secured to the trustee within thirty days after it has been stated, the policy shall pass to the trustee as assets. Of course, the trustee may have no interest in the bankrupt’s life. 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“
The 1911 Supreme Court ruling transformed the life insurance industry by treating a policy as any other asset. This ruling extended additional rights to policyholders, permitting life insurance policyholders to sell their policies similarly to other assets – homes, cars, stocks, bonds, etc.
However, policyholders who sold policies often sold directly to investors, potentially losing out of significant sums of money, as these policyholders did not utilize the market-making capability of a life settlement broker.
The Grigsby vs. Russell ruling also created a new industry, as life settlement companies sprung up during 1980s due the the AIDS crisis. Though not ideal, the market for life settlements expanded significantly as many ill patients sought to draw money from existing life insurance policies in order to deliver funds for medical expenses.
As life insurance has become a popular type of insurance and asset class in the United States, the needs of seniors have have changed. In the 100 years following Grigsby vs. Russell, many people have sought an active retirement and while also seeing medical insurance and other standard costs increasing. Whether needing liquidity to pay for those costs or to enhance daily lifestyle, life settlements have become an increasingly common solution for receiving additional funds.
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