Grigsby v. Russell: The U.S. Supreme Court ruled that life insurance policies are an asset. Like all assets, life insurance policies are now freely assignable for value.
The AIDS epidemic left many terminally ill patients in need of money for treatment. The secondary market for life insurance policy, known as viatical settlement, helped thousands of patients by purchasing their life insurance policies and providing them with much needed cash.
National Association of Insurance Commissioners’ (“NAIC”) Living Benefits Model Act adopted. The Act was the precursor to today’s life settlements acts.
The Viatical Association of America (VAA) is founded as a non‐profit trade group for the viatical industry.
NAIC Model act Amended extensively.
Seniors in America discovered a new option to sell unneeded or unwanted life insurance policies. In need of better alternatives, they found the answer in the secondary market for life insurance policies. Consumers over the age of 65 are now able to sell their unneeded life insurance policy as an alternative to lapse or cash surrender.
The National Conference of Insurance Legislators (NCOIL) adopted the Life Settlements Model Act. The VAA changed its name to the Viatical and Life Settlement Association of America (VLSAA).
The purchase of life insurance policies from senior citizens became widely known as “life settlements”. The NAIC Model Act was, again, amended extensively. New sections were added to address fraud, advertising and civil remedies. Revisions included the addition of “life settlement” in the definition of viatical settlement and the strengthening of disclosures. Optional provisions were added to address the investor side of the viatical transaction.
The life settlement option had quickly grown to an estimated $5 Billion (face value of policy settled) industry. Life settlements were regulated in 25 states and provided seniors significantly more value than the cash surrender option. Many policy owners were still unfamiliar with the option to sell their policies. The Board of the Viatical and Life Settlement Association of America voted to change the name to Life Insurance Settlement Association (LISA).
New surveys were conducted that documented significant opportunity to increase financial market awareness of the life settlement option. The March 2006 issue of Agent’s Sales Journal reported that six in 10 agents didn’t feel they knew enough about life settlements, but that 71% of them believed that life settlements could benefit their clients as a financial planning tool. These types of findings sparked a proactive effort by the industry to raise the visibility of life settlements, including the first-ever Life Settlement Awareness Month held in June 2006 in order to promote greater awareness of the industry.
Thirty‐five states had adopted the original NAIC model act. In June 2007, the NAIC passed a revision to the Viatical Settlements Model Act that addressed the burgeoning life settlement market. The revised Act strengthened consumer protections and addressed concerns about "stranger‐originated life insurance" (STOLI) by imposing a five‐year ban on settling life insurance policies. STOLI transactions involve the purchase of life insurance policies for the sole purpose of selling them immediately.
In November 2007, NCOIL adopted a revision of its Life Settlements Model Act that defined
STOLI and banned its practice, then outlined recommended provider and broker licensing and disclosures to policyholders.
In December 2007, the U.S. Supreme Court declined to hear a case that challenged a state's right to regulate life settlements. The decision in SEC v. Life Partners effectively meant that the regulation of the insurance industry and the life settlement industry would remain in each state and not shift to federal oversight.
At an estimated $12 billion (face value), the industry continued to grow at a rapid pace, while sophisticated companies and institutional investors entered the marketplace. More and more states regulated life settlements, while consumer awareness remained limited. In November 2008, NCOIL reported that lawmakers in the following states introduced legislation regulating and restricting life settlements and STOLI: Arizona, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Maine, Nebraska, Ohio, Oklahoma and West Virginia passed legislation.
A decrease in the investor capital reduced the ability of life settlement funds to purchase new policies. Policyholders settled approximately $8 billion worth of U.S life insurance. A study conducted by Golden Gateway Financial, Inc. and the Insurances Studies Institute found that “80% of seniors owned some form of life insurance policy, but nearly half are unaware it can be sold for cash now.” The financial crisis brought into focus the need for seniors to find liquidity to augment retirement funding.
SEC and the GAO issued reports on the life settlement industry. Conning Research & Consulting estimated that life settlement sales decreased for the third consecutive year in 2010. Capital sources continued to remain skittish about returning to this asset class and investors were focused on acquiring distressed portfolios rather than purchasing new policies. Policyholders settled approximately $3.8 billion worth of U.S. life insurance.
In November 2010, National Conference of Insurance Legislators (NCOIL) adopted its Life Insurance Consumers Disclosure Model Act. This Act mandated that insurers provide written notice to policyowners, if an insured is 60 or older or is known by the insurer to be terminally or chronically ill, and if a policy owner requests to surrender the policy, request an accelerated death benefit under the policy, or when an insurer sends notice to the owner that the policy may lapse, that there are options to lapse or surrender available to them. The NCOIL notice contains eight alternatives, one being “the sale of the policy pursuant to a life settlement contract.”
As the industry matured, capital markets renewed their interest in life settlements. The market saw a resurgence as investor interest returned and recognized the market as a transparent and highly regulated industry. The need for policies was fueled by efforts at NCOIL to alert consumers of their options and alternatives to the lapse or surrender of their life insurance policies, as well as awareness by LISA to educate consumers on their options and the market in general.
Life settlement sales increased in 2012 as compared to the prior year, but in general the asset class continued to struggle to attract new capital in 2012. Investors purchased approximately $2 billion (face value) worth of U.S. life insurance policies in 2012, according to Conning & Co.
The life settlements industry showed major signs of turnaround in 2013. Berkshire Hathaway, the publicly owned invest company founded by Warren Buffett, returned to the asset class for the first time since 2006 by purchasing a portfolio of $300 million (face value) in life insurance policies. Meanwhile, a report from the AAP Life Settlement Market Update indicated that internal rates of return for life settlement transactions conducted in 2013 were in the high-teens - an attractive return at a time when fixed income and other hedge positions were delivering minimal rates of return. According to The Deal Pipeline, total life settlement transactions grew to $2.57 billion (face value) in 2013.
Life settlements continued to show signs of steady recovery from the downturn of 2009-2010. Transaction volumes were reported higher by market participants in all major segments of the industry and Conning & Co. forecast an average annual gross market potential for life settlements of $180 billion from 2014-2023, with an average volume of approximately $3 billion per year in life settlement transactions.