A life settlement is when you sell your life insurance policy to a third party – rather than letting it lapse or just waiting for the death benefit. Our Education pages are designed to help you learn more about how a life settlement works.
The legal basis for a life settlement was established in 1911 when the U.S. Supreme Court (Grigsby v. Russell, 222 U.S. 149) ruled that a life insurance policy is private property and may, therefore, be “assigned” however the owner so chooses. Selling the policy to an unrelated third party is just one of the many types of assignment covered by this ruling.
Life settlements didn’t become main stream in the USA however until the 1980s when an AIDS epidemic suddenly shortened the life expectancies of people, many of whom owned life insurance policies that they no longer needed. As a result of this, the viatical settlements industry emerged. Viatical settlements involve insured people that are terminally or chronically ill. Because of medical advancements, people with AIDS started living longer again and there was less demand for viatical settlements. Then the life settlements industry arose. A life settlement is similar to a viatical settlement, but in a life settlement the insured is typically at least 65 years old and not critically or terminally ill.
The history of life settlements on Wikipedia is a good resource for more details.