Let’s take a step back for a moment to explore the history of this industry – how and when did life settlements begin?
Life settlements aren't new. They've been around in one form or another since 1911, when the U.S. Supreme Court established that life insurance policies are assets – and assets come with the right to be sold.
As an investor, you might be wondering how this practice is legal. In 1911, the Supreme Court ruled in a case, Grigsby vs. Russell, which determined that because a life insurance policy is their personal property, they are able to sell it.
The case made its way to the Supreme Court in 1911 after a doctor named A.H. Grigsby treated a patient named John C. Burchard – and Burchard offered to sell the physician his life insurance policy for $100 – as long as Dr. Grigsby agreed to pay the remaining premiums.
When Burchard died a year later, Dr. Grigsby attempted to collect the benefits from the life insurance policy he'd purchased a year earlier. Unfortunately, the executor of Burchard's estate didn't want to turn over the lump sum payment. The executor took it to court and won.
Justice Oliver Wendell Holmes and the United States Supreme Court eventually took the case and ruled in favor of Dr. Grigsby.
Here's what Holmes said while delivering the court's opinion:
"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."
Just like that, life settlements became a viable alternative investment opportunity--and one in which Americans could sell their premiums for much-needed cash.
While the Supreme Court's ruling on Grigsby vs. Russell opened the door for people to sell and purchase life insurance policies, it wasn't until later that the "life settlement industry" emerged.
The industry officially began in the early 1990s when life settlements were referred to as viaticals. At the time, millions of people were becoming infected with AIDS, which meant that there were many victims and families devastated by this prognosis.
Since those that were diagnosed with AIDS were typically younger, this meant they didn’t own much as far as an estate, but they did own smaller life insurance policies. Life expectancies were around two years and people with the disease required additional finances to live out the rest of their lives as comfortably as possible. And so, the industry began with many selling life insurance policies at the time.
These types of deals continued for decades, but as medical technology advanced, so did life expectancy. Viatical settlements became less common, but another group of individuals in need of money emerged: senior citizens.
In the late 1990s, a new but similar asset class emerged, called life settlements. The main differences here include:
- Increased age of the insured
- Larger death benefits
- Life expectancy is easier to predict due to the insured person’s advanced age
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