In his 1911 landmark U.S. Supreme Court opinion, Justice Oliver Wendell Holmes, Jr. declared the protected rights of U.S. citizens to sell one of their most valuable personal investments... a life insurance policy. This historic ruling and subsequent U.S. court rulings that have protected U.S. consumers' rights to realize value and liquidity in their life insurance investment through transactions known as "life settlements".
When Oliver Wendell Holmes wrote "Old Ironsides" in 1820 honoring the USS Constitution and describing its ironclad fortitude when battling adversity, who would have thought that over 90 years later, his son, Oliver Wendell Holmes, Jr., would author a U.S. Supreme Court opinion that spoke of similar fortitude in consumers battling large U.S. insurance companies.
Since early last century, numerous U.S. court rulings have reinforced citizens’ rights to transfer the ownership of life insurance policies.
In the 1911 U.S. Supreme Court case of Grigsby v. Russell (222 US 149), Dr. Grigsby had treated a patient named John C. Burchard, who needed a surgery he could not afford. Mr. Burchard offered to sell Dr. Grigsby his life insurance policy in return for $100 and his agreement to pay the remaining premiums. Dr. Grigsby agreed, but when Mr. Burchard passed away about a year later, his claim to the benefits was challenged by R. L. Russell, an executor of Burchard’s estate. Russell won in Appeals Court, and eventually the case reached the U.S. Supreme Court where Justice Oliver Wendell Holmes, Jr. delivered his opinion that established a life insurance policy owner’s right to transfer an insurance policy.
In this ruling, Justice Holmes noted that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation. Wrote Holmes, "Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving." This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner. This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to name the policy beneficiary; change the beneficiary designation (unless subject to restrictions); assign the policy as collateral for a loan; borrow against the policy; and sell the policy to another party.
More recent U.S. court rulings that have reinforced life insurance policy owners’ rights include the 5-2 decision by the New York Court of Appeals in the 2010 case of Kramer v. Phoenix Life Insurance and Lincoln Life & Annuity Co. of New York. In this case, the court affirmed the right of an insured party to designate his beneficiary and transfer his policy any time after a policy is issued, regardless of whether the subsequent policy owner has an insurable interest.
In the 2011 ruling by the Delaware Supreme Court in the case of PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust, the court affirmed the common law ability of a legally insured person or insurable trust to sell a policy on that person's life for market value. In this case against a unit of $21 billion in assets Phoenix Companies Inc. of Hartford, Connecticut (NYSE:PNX) who had refused to pay its obligations under issued insurance, the court ruled that the "intent" of the insured to sell a policy is irrelevant. The transaction itself is legal if, at inception, the individual procuring the policy has insurable interests and does not have a pre-negotiated agreement to immediately transfer ownership. "The secondary market for life insurance is perfectly legal," Delaware Chief Justice Myron Steele writes in a decision for the court. "Indeed, today it is highly regulated. In fact, most states have enacted statutes governing secondary market transactions, and all jurisdictions permit the transfer or sale of legitimately procured life insurance policies."