How Did The Life Settlement Market Begin?

The novel life settlement market is the result of numerous historical events, including a judicial decision in 1911. But, by far, the singularly most influential event to give rise to the life settlement market was the HIV/AIDS epidemic in the late 1980s. This disease spurred many to search for ways to turn a life insurance policy into a financial resource to benefit the insured during their lifetime. Furthermore, this disease introduced a new level of awareness about life expectancy–life expectancy is not only determined by age.

In the late 1980s, of particular concern, was the financial need of young and middle-aged persons suffering with HIV/AIDS. In response to the personal financial demands created by this potentially fatal illness, a new market known as the “viatical” contract emerged to help those stricken with the deadly virus to pay for urgently needed medical care. Investors proved willing to purchase life insurance policies for more than the policy’s cash value, but less than its death benefit. Increasingly, policy owners came to view the sale of life insurance policies as a possible source of financial assistance to those who were terminally or chronically ill.

Gradually, however, the landscape of the viatical industry began to evolve. As AIDS research significantly lowered the mortality rate for HIV/AIDS, older adults began to consider the benefits associated with selling their life insurance policy to a third-party in a life settlement contract. The lump sum they acquire by selling their policy helps with medical care costs, as the insured leverages the cash surrender value–and taps in the present value of the death benefit–of their insurance policy.

The emergence of the life settlement industry now attracts a much broader range of investors. Formerly, viatical contracts were something of a cottage industry that attracted investment by individuals or small investment firms. Today, the life settlement industry has become big business and the life settlement contracts attracts corporations and hedge funds as investors.

Prior to the outbreak of the HIV/AIDS epidemic, the general public viewed their life insurance policy as offering few options. One could let a policy lapse or surrender the policy for its cash value. Hardly anyone ever considered the possibility of selling a life insurance policy. However, with the rise of the viatical industry, the general public became aware that there was a market in which one could sell a life insurance policy.

As they say, “the rest is history.”