Monday, 12 August 2013

A History Of The Life Settlement Industry

Although life settlements are relatively new, they didn't simply pop up out of nowhere. In this article Pacific West Capital Group reviews the 100-year history that has led to the modern life settlement.

It All Began With Grigsby v. Russell

In 1911, a man named John Burchard needed a surgery he could not afford. He offered to sell his life insurance policy to his physician, Dr. A. Grigsby. Dr. Grigsby would become the beneficiary of the policy in return for $100 to pay for the surgery, and the promise the doctor would maintain the premiums.

After Mr. Burchard died, Dr. Grigsby tried to collect on the policy but was stopped by R. Russell, the executor of Mr. Burchard's estate. The case eventually went to the U.S. Supreme Court where it was ruled that the transaction was legal. This is the first recorded case of what was later dubbed a viatical settlement, the sale of a life insurance policy by a terminally ill policyholder.

The AIDS Crisis

Viatical settlements were rare over the next 70+ years. Terminally ill patients usually needed their policies to take care of their survivors, and couldn't afford to sell them just to cover short-term medical expenses. That changed in the 1980s when AIDS swept through the United States. Most of the patients were gay men who didn't have children, the traditional beneficiaries of life insurance. They were the ideal policyholders for viatical settlements and the transactions took off.

Unfortunately, business booms attract both honest businesses and scam artists. A small number of companies indulged in bad business practices and ended up getting the bulk of media attention, so viatical settlements got an unfairly negative reputation for a few years. In addition, the discovery of new drugs greatly extended the lifespans of the AIDS patients, lowering the annual return on the policies for investors.

The Rise Of Life Settlements

As viaticals became less attractive, the industry realized there was another population that fit the model: the elderly. Older Americans often face the problem of being rich on paper but poor in cash. Their assets are tied up in non-liquid assets such as homes and life insurance policies. They have grown, independent children who don't need the death benefit, and if the policyholder is divorced or widowed then there is no spouse to support either.

Thus was created the life settlement. Companies like Pacific West Capital purchase unneeded life insurance policies from older policyholders for more than the surrender value -- a 2009 study by the United States Senate Special Committee on Aging calculated life settlements are an average of eight times greater than cash surrender values -- and sell fractional portions of the benefits to investors.

The industry is still young, and organizations are finding new ways to turn these assets into safe and reliable investments. Pacific West Capital Group reviews policies and accepts only those that meet strict investment guidelines, minimizing the risk to our investors.