LIFE SETTLEMENTS: HOW THEY WORK AND WHEN THEY ARE UNLAWFUL

Jerry Furniss
Michael Harrington
Kristina Oswald
University of Montana

ABSTRACT

The life settlement industry began in the early 1900s when the U.S. Supreme Court first
recognized that a life insurance policy’s death benefit could be sold to an unrelated third party.
Over the years, these arrangements, eventually referred to as viaticals, became more formalized.
The growth of viaticals intensified due to the spread of the Acquired Immune Deficiency Syndrome
(AIDS) epidemic during the 1980s, focusing on the sale of life insurance policies’ death benefits
when policyowners, regardless of age, were terminally ill and needed cash for their final days.
The life settlement industry grew out of the maturity of the viaticals’ markets, with the focus on
older policyowners who were not necessarily terminally ill. The 2001 Model Life Settlement
Regulations focused on life settlement transactions and protection of consumers from fraudulent
practices. The model rules and the entry of the capital markets paved the way for the creation of a
massive industry, one in which investors can purchase into a pool of life insurance policies.
Certain unscrupulous investors pushed the limits of legality when dealing with consumers.
Therefore, regulations now make certain life settlement transactions unlawful. This article
examines the development of the life settlement market and the practices that are deemed unlawful
under state insurance law.

Keywords: Viatical settlements, life settlements, transfer ownership of life insurance policy, insurable interest in the patient’s life, fraudulent by intermediaries, insurable interest laws, legislation model, federal and state
laws