How a 1911 Supreme Court Ruling Led to an Investment Opportunity Today
A new trend in the life insurance industry has investors from all levels excited: viatical settlements. What is a viatical settlement? It’s a fancier term that refers to the selling of a life insurance policy to a third party for a cash lump sum, as well as agreeing to pay the premiums for the life of the insured.
How the Insurance Settlement Process Works
Before the process begins, the insured must contact their life insurance agent. The agent will work closely with an agent from an insurance settlement company such as Mason Finance. The goal is for the insured to receive a lump sum of around 25 to 30 percent of the value payout.
In addition to that, many states have comprehensive life settlement laws and regulations, except for South Dakota, Wyoming, Missouri, Alabama, and South Carolina. States that have regulations governing the insurance settlement industry require that such companies provide the insured substantial disclosure, including how much the brokers are getting paid.
The History Behind Viatical Settlements: Abridged Version
Many customs can be dated back to Ancient Rome, and life insurance is one of those things. Called “burial clubs,” Roman citizens would form clubs where the members covered the funeral expenses of other members, as well as assist their closest surviving relatives financially.
In 1706, two men named Sir Thomas Allen and William Talbot founded the Amicable Society for a Perpetual Assurance Office and was the first modern insurance company to sell life insurance policies.
In 1759, the Presbyterian Synods located in New York City and Philadelphia formed the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers (they liked long and complicated company names back then). In 1769, a similar fund was organized by Episcopalian priests.
Grigsby v. Russell, 222 U.S. 149 (1911)
In the early 1900s, a man named John C. Burchard sought medical treatment for an unknown illness from a doctor named A. H. Grigsby. At some point, Burchard needed a surgical operation but couldn’t afford it.
To pay for his surgery, Burchard offered to sell his life insurance policy to Dr. Grigsby. Grigsby agreed to purchase the policy for $100 cash and also agreed to pay the premiums for as long a Burchard remained alive. It’s not clear what illness Burchard suffered from, or even that it was terminal, but he eventually passed away. It’s also not entirely clear as to why Dr. Grigsby ended up in court with the insurance company over the life insurance policy he bought from the late Burchard.
The important thing is that the U.S. Supreme Court decided that, since an insurance policy is considered an asset owned by the policyholder, the holder has the inherent right to sell it to whomever he or she wishes. Thus, the case of Grigsby v. Russell, 222 U.S. 149 (1911) resulted in the first viatical settlement transaction in history.
Viatical Settlements and the AIDS Epidemic
In the 1980s, viatical settlements grew popular among young gay men in the United States as the AIDS epidemic hit its peak. The earliest victims of the AIDS epidemic were primarily young with no spouses or children. Most were covered by employer-provided life insurance policies or term life insurance policies.
With no “traditional” beneficiaries, the parents of these terminally ill men became the sole beneficiaries. However, for many reasons, parents weren’t interested in receiving the benefits or didn’t need the money. Viatical settlements allowed a way for many suffering from AIDS to get some value from their life policy while still alive.
At the peak of the AIDS epidemic, the mortality rate of patients was extremely high. Furthermore, they were given a very short life expectancy, with the average patient dying one or two years after diagnosis, which led to further investor confidence. These two aspects created a surge in viatical settlements as viators and investors mutually benefited.
Today, the overall mortality rate has gotten much better, with terminally ill patients living longer than before. However, technological advances such as Big Data, cloud software, and monitoring devices, such as wearables, have rejuvenated investors’ interest in the viatical settlements industry.