We often cite Grigsby v. Russell as a landmark U.S. Supreme Court case validating life settlements. The court's decision is invoked whenever anyone questions the seemingly peculiar idea of selling a life insurance policy.
The SCOTUS ruling is fundamental to helping people realize the benefit of an investment they thought would only accrue after death. Yet not many people have read the court's brief opinion.
At first blush, Grigsby might not seem to pass the red-face test. But Justice Oliver Wendell Holmes, Jr., a keen legal scholar, understood the important relationship between the law and economics.
In Grigsby, a man named Burchard took out a life insurance policy, made two premium payments, was late on the third and, needing surgery but having no money, sold it for $100 to his doctor, Grigsby. By and by, the policy matured (i.e., Burchard died, but to my knowledge, not as a result of the surgery). And the administrators of the insured's estate sought to recover the insurance payout from its beneficiary, Dr. Grigsby.
Such a fact scenario might raise eyebrows in an era of consumer protection, when we can count on one hand the number of life settlement complaints filed in the last 6 years. Yet, Grigsby is a seminal case.
In his opinion, Holmes wrote, "….life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give life policies the ordinary characteristics of property."
Fortunately, Burchard invested in an insurance asset he could sell (one worth almost $2,500 today, adjusted for inflation since 1911) and was therefore able to enhance or prolong his life by having his surgery.
Thankfully, Burchard not only found a willing buyer, but had a life insurance carrier that acknowledged and acquiesced to the arrangement, and that continued to receive premium payments. If one could identify a "loser" in this transaction it might be Burchard's estate/family, but even they presumably benefited by the enhanced life his asset provided him. This may not have been the first life settlement transaction, but it has certainly been the most memorable.
That was over a century ago. Since then, life settlements have enabled people no longer needing life insurance to realize value far above the cash surrender amount on their policies, which ironically felt more like an unnecessary debt burden than an asset. Consider these real-world examples:
-
Senior citizens desiring to maintain independence cashing-out of unneeded life insurance policies at 5 to 8 times the cash surrender value, unburdening family members.
-
People with urgent health issues being able to afford treatment, co-pays, and deductibles.
-
Disabled veterans, often receiving inadequate benefits, enjoying better quality of life.
-
Estate planners more comprehensively benefitting clients.
-
State and federal government seeing increased tax revenue, and lower public assistance costs.
-
Insurance companies continuing to profit from premium payments.
Notwithstanding a well-established, 115 year-old U.S. Supreme Court ruling, true stories of policy owners retaining their quality of life and financial independence, and insurance companies counting on continued premium streams, the liberty to liquidate "one of the best recognized forms of investment" continues to be eroded by well-intentioned but ill-advised legislators across the nation.
Oddly, this effort is led by lobbyists who represent the very insurance companies that measured the risk, issued the policy, and profit by the premium stream. Sadly, a significant part of the insurance model is not only a bet on life expectancy, but a gamble that some percentage of policy owners will simply give up after years of paying the premiums, or settle on an embarrassingly low cash surrender "value."
