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By the time Americans reach retirement age, it’s likely they have a good understanding of the concept of insurance and how an insurance company makes money. What isn’t as understood is how the life settlement industry works, because unlike insurance, not everyone will qualify for or need this benefit in their lifetime. A life settlement is when someone sells a life insurance policy to a third-party buyer for more than the cash surrender value of the policy. The third party keeps the policy active and ultimately collects the death benefit. If you’re considering this kind of transaction, a clear description of the industry and its history can be helpful in determining if a life settlement is the right choice for you.
The History of the Life Settlement Industry
You might be surprised to learn the first life settlement took place between a Doctor Grigsby and his patient, John C. Burchard. Burchard needed surgery he could not afford, so he sold his insurance policy to Dr. Grigsby and promised him the death benefit. When Burchard died a year later, a member of his family challenged the contract. The case went all the way to the US Supreme Court in 1911, when an insurance policy was determined to be personal property in Grigsby v Russell, and therefore allowed to be sold.
As the decades passed, the practice of medicine advanced by leaps and bounds, increasing life expectancy and decreasing the need to barter with doctors for services. But in the 1980’s pandemics like AIDS and other fast-developing terminal illnesses started to spread. Affected individuals needed a way to get rid of life insurance they no longer needed, but also needed a greater cash return than the surrender value to the insurance company. This gave birth to the mainstream viatical settlement, which allowed terminally-ill individuals to sell life insurance policies they didn’t need to pay for necessities in their remaining time. By the end of the 1980s, even retirees and seniors without terminal illnesses were being offered opportunities to sell their policies for more than ever before in life settlements.
Is the Life Settlement Industry Regulated?
Life settlements are regulated in 43 states and in the territory of Puerto Rico. These regulations define, among other things, how long a policyholder must own their life insurance before they can sell it in a life settlement. The National Conference of Insurance Legislators (NCOIL) Life Settlement Model Act has also been closely adopted into law by 20 states. This act defines licensing requirements, fraud prevention requirements, disclosure requirements, reporting requirements, and protects individuals from stranger-originated life insurance (STOLI), or a dishonest broker taking out additional policies on someone they provided service to. Twelve other states have adopted hybrid laws between the NCOIL Act and the National Association of Insurance Commissioners (NAIC) Viatical Settlements Model Act.
In most states, members of the life settlement industry are required to make policyholders aware of alternative options to the settlement, offers and counteroffers, and any tax risks. They must also disclose their own fees. Life settlement brokers are required to be licensed and adhere to all privacy laws (including HIPAA). They must submit anti-fraud plans to state and Federal bodies to regularly prove the policies they buy and or/sell weren’t STOLI or otherwise illegally-obtained plans.
In short, a life settlement is one of the most transparent transactions in the insurance industry, and many regulatory bodies keep our professionals honest. A life settlement isn’t ideal for every individual, but the life settlement industry exists as a support for those who need it. From people in need of funds for medical care, to retirees looking to liquidate assets and restructure finances for a long retirement, many people stand to benefit from life settlements now and in the future. Did you know you can sell all or a portion of a life insurance policy, even term insurance? There’s still plenty to learn about the life settlement industry, so please contact me right away with any questions.
Case Study: Alfred and Ruth bought life insurance when they were young to protect their children’s future. The kids are all grown and their youngest is 46 years old. Alfred and Ruth no longer need the life insurance coverage. Alfred and Ruth, concerned about outliving their financial resources, sold their life insurance policy for an immediate cash payment and used the proceeds to pay off a few medical bills and supplement their retirement.
Life Settlement Advisors