The legality of investing in life settlements traces back to a 1911 Supreme Court decision, Grigsby vs Russell, 222 U.S. 149. To pay for an operation, a patient sold his life insurance policy, plus payment for remaining premiums, to A.H. Grigsby, the doctor. The patient died a year later.
Grigsby tried to collect the benefits, but an executor of the patient’s estate challenged this. The grounds were that the policy had previously been sold to a third party (Grigsby) who had no insurable interest in the insured.
The Supreme Court ruled in favor of Grigsby and held that anyone who owns a life insurance policy has a right to:
Grigsby created an alternative asset class, though one that remained very quiet and largely unknown outside of discrete, private transactions for the better part of a century.
Fast forward to the 1980s to the start of the AIDS epidemic. Shorter lifespans and expensive treatments created a secondary market for life insurance policies being sold to brokers for a lump sum. In turn, these brokers resold the policies to investors.
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At this time, there was little governmental regulation overseeing these transactions, known as “viatical settlements.” Furthermore, because new treatments were being developed to combat the AIDS virus, assumptions about estimated life expectancies of the insured were often incorrect. Investment returns suffered and litigation ensued.
Shorter lifespans and expensive treatments created a secondary market for life insurance policies being sold to brokers for a lump sum.
The dust started to settle in the 1990s and new legislation was enacted to help create tighter regulatory oversight. Policy portfolios were bundled together and sold in a process called “securitization.” These developments led to a renewed interest in this asset class, now commonly referred to as “senior life settlements” or the “longevity-linked asset class”.
This asset class has been the subject of many newer studies by research firms and business schools. In 2013, the London Business School conducted a study that took place over 10 years and studied 9,000 policies. The study found that investors gained four times the yield from the market.
A Wharton Business School study also found favorable returns for participating investors. However, it should be noted that this may drive up policy premiums overall.
Here are some reasons investors may look toward investing in life settlements.
Life settlements have not always been the best investment, but they’ve evolved over time. Throughout the last few decades, investing in life settlements has proven to be reliable and lucrative in many ways.
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Gary Opp is the owner of Redwood Alternative Investments and is a well-respected estate planning specialist/investment advisor with 18 years of experience.
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