Life Settlement Defined
A life settlement is the selling of one's life insurance policy to a third party for a one-time cash payment. The purchaser then becomes the beneficiary of the policy and begins paying the premiums. Typically, the purchaser is an experienced institutional investor, and policies will have face amounts in excess of $250,000.
Breaking down a Life SettlementLife settlements are usually only done when the insured person does have a known life-threatening illness. They are often done with "key individual" insurance policies held by companies on executives, who no longer work there. The company has a chance to cash out on a policy that was previously illiquid. Sometimes people outgrow their need for a specific life insurance policy, and a life settlement may offer the chance to gain more than the policy's cash surrender value.
History of the Life SettlementThe existence of life settlements effectively creates a secondary market for life insurance policies. Although the secondary market for life insurance is relatively new, it was 100 years in the making, thanks to several events, judicial rulings, and key individuals.
The U.S. Supreme Court case of Grigsby v. Russell, 222 U.S. 149 (1911) established a life insurance policy as private property, which may be assigned at the will of the owner. 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. His opinion placed the ownership rights in a life insurance policy on the same legal footing as a more traditional investment property, such as stocks and bonds. As with these properties, a life insurance policy is transferrable to another person at the discretion of the policy owner. The Holmes decision established a life insurance policy as a transferable property that contains specific legal rights, including the right to:
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