Viatical Settlement - History

History

Viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic peaked. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional beneficiaries under a life insurance policy), but they had life insurance policies through employment or as a result of investments. The beneficiaries under the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policy owner was still alive.

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. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.

A U.S. Supreme Court decision from 1911 provides the legal basis for viatical settlements. In Grigsby v. Russell, 222 U.S. 149 (1911), Dr. A. H. Grigsby treated a patient named John C. Burchard. Mr. Burchard, being in need of a particular surgical operation, offered to sell Dr. Grigsby his life insurance policy in return for $100 and for agreeing to pay the remaining premiums. Dr. Grigsby agreed and as a result, the first viatical settlement transaction was created. 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. Viatical settlements were rare for almost eight decades until the onset of the AIDS epidemic.

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. Today, many states regulate viatical and life settlements and many more are developing legislation and regulations. As of June 2011, the states that do not regulate viatical settlements are Wyoming, South Dakota, Missouri, Alabama, and South Carolina. All other states regulate viatical settlements.

Despite the bad experience of some investors, viatical settlements remain an often valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences.