How the AIDS Crisis Spawned a Multibillion-Dollar Life Settlement Market

A rare Stage IV lung cancer diagnosis over a decade ago led Frank Sierawski, then 35, to expect he had little time left. He survived, thanks to a new drug that put his cancer into remission, and kept paying premiums on two life insurance policies he had taken out before his diagnosis.

Just over a year ago, Sierawski came across a Facebook post describing a "life settlement" — a deal in which a policyholder sells their life insurance policy to an investor for a fraction of its face value, often 20 to 30 cents on the dollar. The investor then pays the premiums to keep the policy active and collects the full payout when the original policyholder dies, instead of that person's beneficiaries.

Sierawski, who works in finance, realized his cancer history could make his policy more attractive to buyers seeking a faster return. After filling out some online forms, he says his phone began ringing constantly with offers.

The legal basis for this market traces back to a Supreme Court ruling in 1911. In an early case, a man had sold his life insurance policy to his doctor for $100 to cover an operation. When he died, the courts had to decide who was entitled to the payout — the doctor or the man's estate. The Supreme Court ruled that once a policy is legitimately taken out under the principle of "insurable interest," meaning the policyholder's death would cause the beneficiary financial or emotional harm, the policy becomes the holder's property to sell as they wish.

That legal principle did not create an active market until the late 1980s, during the AIDS crisis. Scott Page, whose partner Greg was dying of AIDS, described how the couple struggled financially as Greg's illness worsened and he could no longer work as a carpenter. Sorting through unpaid bills, Page found a notice for the annual premium on Greg's $100,000 life insurance policy, and realized they urgently needed a way to pay it as Greg's health declined.

Those desperate, informal deals among AIDS patients needing cash and investors willing to buy their policies became the origin of what has grown into a multibillion-dollar life settlement industry, according to reporting from NPR's Planet Money.