Have You Heard About Grigsby V. Russell?

We often cite the US Supreme Court case of Grigsby v. Russell as one of the central tenets of the life settlement industry.  It is invoked whenever anyone questions the seemingly peculiar idea of selling a life insurance policy.  It is the fundamental reason we are able to help people realize the benefit of an investment they thought would only accrue after death.  Yet not many people have read the relatively brief opinion.

At first blush, the Grigsby case might not even 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 today in an era of consumer protection where we can count on one hand the number of life settlement complaints filed in the last 6 years!  Yet this is the seminal case wherein Holmes said, “….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 (adjusted for inflation since 1911, almost $2500 today) and was therefore able to enhance or prolong his life by having his surgery.  And thankfully he not only found a willing buyer, but had an insurance carrier that acknowledged and acquiesced to the arrangement, and continued to receive premium payments.  If one could possibly find 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 5-8 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.

Still, notwithstanding a well-established, 115 year-old US 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, it is because a significant part of the insurance model is not only a bet on life expectancy, but a bet 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.”

The business of government is rightly predicated on protecting the public good; the business of the insurance industry is rightly predicated on maximizing profit.  Far from upsetting that balance, Holmes reinforced it with the Grigsby decision. To be sure, insurance fraud must be stopped, but the way to strike a balance between the public good and private profit is to empower, not restrict, the public’s right to liquidate insurance assets.

Recognizing and embracing the Grigsby doctrine serves good government by strengthening its revenue base, and the insurance industry by ensuring its revenue stream.  It can also tremendously empower some of the most vulnerable. Life settlements ensure that life insurance policies will continue to be sold first to forward-thinking individuals, and then again to investors as a solid investment asset class, all the while providing private and public revenue.

Read Justice Holmes’ opinion in the Grigsby case. This win-win-win should not be curtailed by alarmists who cite potential excesses in an industry that has operated legitimately for many years.  Burchard, Grigsby, and the insurance company that willingly paid the benefit would agree.