Life settlement
A life settlement or viatical settlement is the sale of an existing life insurance policy for more than its cash surrender value, but less than its net death benefit, to a third party investor. Such a sale provides the policy owner with a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
In many jurisdictions, a viatical is a life settlement where the insured has less than two-year life expectancy. However, some jurisdictions, such as the U.S. state of Maryland, use the term viatical settlement for both types.
Description
, permanent, or whole life insurance policies qualify for life settlement. Most commonly, universal life insurance policies are sold. Policyholders are generally 65 or older and own a life insurance policy worth $100,000 or more.Policyholders may enter into life settlements, among other reasons, because they can no longer afford the ongoing premiums, they no longer need or want the policy, to fund long-term care, increased medical costs, or they need money for other expenses. Viatical settlements are often sold by, or on behalf of, an insured who is terminally or chronically ill. The policyholder may receive three to five times more than the surrender value for the policy.
The transaction may also be structured as a death benefit transaction, in which policyholders receive cash payments and their beneficiaries also receive a payment after the death of the life insured. After the transaction, the policyholder will no longer have obligations to pay premium.
Life settlement history
''Grigsby v. Russell'' (1911)
The U.S. Supreme Court case of Grigsby v. Russell, 222 U.S. 149 established and legitimized the sale of the right to receive life insurance benefits, ruling that a policy was private property which may be assigned at the will of the owner. The case was argued in November 1911 and decided on December 4, 1911. 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.Dr. A. H. Grigsby treated a patient named John C. Burchard. Burchard was unable to pay for a needed operation but had an insurance policy on his life, being in need of a particular surgical operation, offered to sell Dr. Grigsby his life insurance policy in return for $100. Grigsby would pay the remaining premiums. When Mr. Burchard died, Dr. Grigsby attempted to collect the benefits. An executor of Burchard's estate challenged Dr. Grigsby 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. He stated in relevant part that
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.The Supreme Court's 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. However, viatical settlements remained rare for almost eight decades until the onset of the AIDS epidemic.
1980s–1999
Despite the Supreme Court ruling, life settlements remained extremely uncommon due to lack of awareness from policy holders and lack of interest from potential investors. That changed in the 1980s when the U.S. faced an AIDS epidemic. The early victims of AIDS in the U.S. were largely gay men, typically relatively young and without wives or children, but often covered by life insurance through employment or as a result of investments. The beneficiaries under the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policy owner was still alive.At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. As medical advancements improved the lives of those persons living with terminal or chronic illnesses, the life settlement industry emerged.
However, by the mid-1990s, this investment strategy had faded away because of the rise of antiviral drugs.
In its place arose a new strategy focusing on acquiring policies of the elderly, although a niche business persists to this day acquiring policies on terminally ill of all ages. Policies of terminally ill patients are rare for two key reasons. First, the market size of terminally ill insured interested in selling their policies is small. Second, carriers now offer accelerated death benefit riders, which pay out if the insured is terminally ill, so there is no need for a settlement.
In 1993, the National Association of Insurance Commissioners adopted the first Viatical Settlement Model Act. The term "viatical settlement" refers to a life settlement where the life expectancy is under two years because the person is terminally ill.
2000–present
In 2000, the National Conference of Insurance Legislators adopted the Life Settlements Model Act. In 2001, "life settlements" became a common term to describe the purchase of life insurance policies from senior citizens.In 2005, the life settlement industry was regulated in twenty-five states, providing seniors more value than the cash surrender option.
In 2007, the NAIC and NAIC adopted revisions to the Viatical Settlements Model Act and the Life Settlements Model Act to strengthen consumer protections and address STOLI concerns.
In 2010, NCOIL adopted the Life Insurance Consumers Disclosure Model Act.
Early improper activities among a few bad actors produced a fear among consumers regarding viatical settlements. Life insurers became concerned about individuals purchasing policies purely for speculative purposes. Many US states regulate viatical and life settlements and many more are developing legislation and regulations. As of June 2011, the only states that do not regulate viatical settlements are Wyoming, South Dakota, Missouri, Alabama, and South Carolina.
Following the Tax Cuts and Jobs Act of 2017, proceeds up to the total amount of premiums paid over time are tax free, and proceeds more than the tax basis up to the amount of the policy's surrender value are taxed as ordinary income. Proceeds in excess of the surrender value are taxed as capital gains.
In 2020, the Senior Health Planning Account Act was introduced in the U.S. House of Representatives. It would allow seniors to pay for health care costs using tax-exempt proceeds from the sale of their life insurance. It was reintroduced in 2021.
According to a 2023 study by a life settlement industry group, policyholders received approximately $842 million through life settlement transactions, representing $707 million in additional value compared to policy lapses or insurer surrenders.
Market size
Life settlements remain a niche asset class. For the year ending 2020, according to the Life Settlement Report by the Deal, there were 3,241 policies purchased with a total face value of $4.6B on the secondary market. This was up from 2019 when 2,878 policies for a total face value of $4.4B were purchased on the secondary market. In contrast, as of 2018, there were 267M life insurance policies in force in the United States.Moreover, it is estimated that roughly 10M policies a year lapse. Since policyowners receive more money by selling, not lapsing, many believe the life settlement market will continue to grow.
Major trends
There are major industry trends. One is the rise in asset capital. More institutional investors are funding life settlements and have invested billions of dollars in assets since the early 2000s. For reference, in the primary market, insurance companies sell life insurance policies to market individuals, who become policyowners. In the secondary market, policyowners' policies are sold to third parties such as life settlement providers, who purchase policies on behalf of third party investors such as institutional investors. In the tertiary market, third party investors trade policies, which are included in the asset class.Another major trend is direct-to-consumer marketing. Some providers and brokers engage in advertising to raise awareness of the life settlement option. This allows policy owners an easy way to engage directly with providers and brokers. By working directly with a provider or a broker, policy owners are not submitting through a financial advisor or other professional.
Life settlement technology surrounding apis, apps and AI continue to improve the industries transparency for consumers.
The final trend is more efficient medical underwriting. It is the result of new technologies and more reliable data from systems that are utilizing prescription and clinical database searches. While the market for life expectancy companies has grown more competitive, managers have become more adept with analytics and are better able to estimate more accurate life expectancies for life settlement transactions. This mitigates the risk of serious financial losses heightened by prior underwriting methodologies and increases profitability and investor demand for policies.
Transaction parties
- Policyowner or policyholder - The party who owns the insurance policy
- Insured - Person whose life is tied to the policy
- Financial advisor - Advisor to the policyowner
- Life settlement broker - Company that shops policies to life settlement providers
- Life settlement provider - A company that is licensed by state insurance departments to purchase life insurance policies from policyowners
- Investor - Institutions that purchase pools of policies from life settlement providers
Until 2022, one of the largest life settlement providers was GWG, which purchased over $3 billion of life settlements. However, GWG declared bankruptcy in 2022, and it has subsequently come under scrutiny by regulators, journalists, and attorneys who say it inappropriately marketed its investments to mom-and-pop investors. As of 2025, the largest buyers in the U.S. are Coventry Direct and Abacus Life. The number of life settlement providers is growing, with 22 licensed in California alone.