Investors Turn Life Insurance Policies Into Multibillion Dollar Market

Investors and Wall Street firms are increasingly purchasing active life insurance policies from policyholders, expanding a secondary market into a multibillion-dollar industry where external buyers collect death benefits.

Known as life settlements, these transactions allow individuals to sell their policies to third-party investors for a fraction of the face value, typically 20 to 30 cents on the dollar, according to NPR's Planet Money.

The secondary market traces its origins to an early 20th-century legal challenge. In 1911, the Supreme Court ruled that a policyholder could sell their life insurance policy as personal property, provided the policy was legally acquired under standard insurable interest rules.

The modern practice developed into a commercial market during the AIDS epidemic in the late 1980s. Scott Page, a pioneer of the trade, helped establish viatical settlements after seeking financial options for his partner, Greg, who had AIDS and could no longer work as a carpenter.

Facing increasing financial strain, the couple received assistance from a benefactor who agreed to pay the policy premiums in exchange for reimbursement from the eventual death benefit.

That arrangement laid the groundwork for viatical settlement companies, which bought policies directly from terminally ill individuals needing immediate funds.

Following the emergence of effective antiviral treatments for HIV, the viatical market contracted, giving rise to modern life settlements. Today, investors routinely acquire policies from healthy older adults and individuals with serious health histories, assuming the premium payments to collect the full payout upon the original policyholder's death.