Product Code Database
A life settlement or viatical settlement (from Latin viaticum, something received before death) is the sale of an existing life insurance policy (typically of Senior Citizens) for more than its cash surrender value, but less than its net death benefit, to a third party investor. Such a sale provides the policy owner with a lump sum. Life Settlement History The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
In many jurisdictions, a viatical is a life settlement where the insured has less than two-year life expectancy. However, some jurisdictions, such as the U.S. state of Maryland, use the term viatical settlement for both types.
Policyholders may enter into life settlements, among other reasons, because they can no longer afford the ongoing premiums, they no longer need or want the policy, to fund long-term care, increased medical costs, or they need money for other expenses. Viatical settlements are often sold by, or on behalf of, an insured who is terminally or chronically ill. The policyholder may receive three to five times more than the surrender value for the policy.
The transaction may also be structured as a death benefit transaction, in which policyholders receive cash payments and their beneficiaries also receive a payment after the death of the life insured. After the transaction, the policyholder will no longer have obligations to pay premium.
Dr. A. H. Grigsby treated a patient named John C. Burchard. Burchard was unable to pay for a needed operation but had an insurance policy on his life, being in need of a particular surgical operation, offered to sell Dr. Grigsby his life insurance policy in return for $100. Grigsby would pay the remaining premiums. When Mr. Burchard died, Dr. Grigsby attempted to collect the benefits. An executor of Burchard's estate challenged Dr. Grigsby in Appeals Court and won. The case eventually reached the U.S. Supreme Court where Justice Oliver Wendell Holmes Jr. delivered the opinion of the court. He stated in relevant part that
So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands.The Supreme Court's decision set forth the fundamental principle upon which the viatical settlement and later, the life settlement industry were based: a life insurance policy is private property, which can be assigned at the will of the owner. However, viatical settlements remained rare for almost eight decades until the onset of the AIDS epidemic.
At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. As medical advancements improved the lives of those persons living with terminal or chronic illnesses, the life settlement industry emerged.
However, by the mid-1990s, this investment strategy had faded away because of the rise of .
In its place arose a new strategy focusing on acquiring policies of the elderly, although a niche business persists to this day acquiring policies on terminally ill of all ages. Policies of terminally ill patients are rare for two key reasons. First, the market size of terminally ill insured interested in selling their policies is small. Second, carriers now offer accelerated death benefit riders, which pay out if the insured is terminally ill, so there is no need for a settlement.
In 1993, the National Association of Insurance Commissioners (NAIC) adopted the first Viatical Settlement Model Act. The term "viatical settlement" refers to a life settlement where the life expectancy is under two years because the person is terminally ill.
In 2005, the life settlement industry was regulated in twenty-five states, providing seniors more value than the cash surrender option.
In 2007, the NAIC and NAIC adopted revisions to the Viatical Settlements Model Act and the Life Settlements Model Act to strengthen consumer protections and address STOLI (stranger-originated life insurance) concerns.
In 2010, NCOIL adopted the Life Insurance Consumers Disclosure Model Act.
Early improper activities among a few bad actors produced a fear among consumers regarding viatical settlements. Life insurers became concerned about individuals purchasing policies purely for speculative purposes. Many US states regulate viatical and life settlements and many more are developing legislation and regulations. As of June 2011, the only states that do not regulate viatical settlements are Wyoming, South Dakota, Missouri, Alabama, and South Carolina.Regulation, Life Insurance Settlement Association, retrieved March 4, 2012, at [2]
Following the Tax Cuts and Jobs Act of 2017, proceeds up to the total amount of premiums paid over time are tax free, and proceeds more than the tax basis up to the amount of the policy's surrender value are taxed as ordinary income. Proceeds in excess of the surrender value are taxed as capital gains.
In 2020, the Senior Health Planning Account Act (HR 5958) was introduced in the U.S. House of Representatives. It would allow seniors to pay for health care costs using tax-exempt proceeds from the sale of their life insurance. It was reintroduced in 2021.
According to a 2023 study by a life settlement industry group, policyholders received approximately $842 million through life settlement transactions, representing $707 million in additional value compared to policy lapses or insurer surrenders.
Extrapolated from 4.2% annual lapse rate Since policyowners receive more money by selling, not lapsing, many believe the life settlement market will continue to grow.
Another major trend is direct-to-consumer marketing. Some providers and brokers engage in advertising to raise awareness of the life settlement option. This allows policy owners an easy way to engage directly with providers and brokers. By working directly with a provider or a broker, policy owners are not submitting through a financial advisor or other professional.
Life settlement technology surrounding apis, apps and AI continue to improve the industries transparency for consumers.
The final trend is more efficient medical underwriting. It is the result of new technologies and more reliable data from systems that are utilizing prescription and clinical database searches. While the market for life expectancy companies has grown more competitive, managers have become more adept with analytics and are better able to estimate more accurate life expectancies for life settlement transactions. This mitigates the risk of serious financial losses heightened by prior underwriting methodologies and increases profitability and investor demand for policies.
A policyowner or the insured may contact a life settlement provider, financial advisor, or life settlement broker regarding the sale of a life insurance policy. Financial advisors may use life settlement brokers to access life settlement providers, or they may go directly to life settlement providers. Financial advisors and life settlement brokers represent the policyowner regarding the sale of a life insurance policy. Life settlement providers purchase policies and either retain ownership of those policies, or they sell pools of policies to institutional investors. Expected returns for the buyer range from 8 to 10 per cent after fees.
Until 2022, one of the largest life settlement providers was GWG, which purchased over $3 billion of life settlements. However, GWG declared bankruptcy in 2022, and it has subsequently come under scrutiny by regulators, journalists, and attorneys who say it inappropriately marketed its investments to mom-and-pop investors. As of 2025, the largest buyers in the U.S. are Coventry Direct and Abacus Life. The number of life settlement providers (buyers) is growing, with 22 licensed in California alone.
The Institutional Longevity Markets Association, Inc. (ILMA) is a trade association formed to regulate the life settlement and longevity marketplace.
The European Life Settlement Association (ELSA) represents European investors, service providers and intermediaries. Founded in 2009, it sets standards for the European life settlement industry.
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The sensitivity of the price of a life settlement to variations in the value of the variables on which it depends (insured’s life expectancy and interest rate) can be determined through two different measures, duration and convexity.
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Viatical settlements are valued by examining market prices according to the ‘fair value’ approach using closed life settlement transactions. Market data is collected from multiple providers and that information is available to clients as well as third parties. The pricing of life settlements relies on the quantification of two main variables: the insured's life expectancy and the internal rate of return (which reflects the heightened risk associated with life settlements compared to other assets). The actuarial literature presents various approaches to pricing life settlements, including deterministic, probabilistic, stochastic, and fuzzy methods. The sensitivity of the price of a life settlement to variations in the value of the variables on which it depends (insured’s life expectancy and interest rate) can be determined through two different measures, duration and convexity.
A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences.
In 2016, the University of Pennsylvania's Wharton Business School and Washington University’s Olin Business School conducted another academic study. The study found that the majority of life insurance policies do not pay a death benefit, with nearly 85 percent of term policies and 88 percent of universal life policies failing to pay a death claim.
Another study by Conning & Co. Research, Life Settlements: Additional Pressure on Life Profits, found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements.
A life insurance industry-sponsored study by Deloitte Consulting and the University of Connecticut came to negative conclusions regarding the life settlement market.http://www.quatloos.com/uconn_deloitte_life_settlements.pdf
A 2013 study found that a life settlement, on average, delivered four times what policy owners would have received had they surrendered their policies to a life insurance company.
In 2020, the amount paid to sellers increased from $839.6 million to $848.1 million.
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