Posted on Dec 11, 2007

The Supreme Court declined Monday to rule on a case that tests whether states can regulate the sale of life insurance by policyholders to investors, a practice known as "viatical" or life settlements.

Under viatical settlements, individuals sell their life insurance policies for less than face value to third parties, including investors such as hedge funds, in order to realize an immediate cash benefit.

The policyholders are frequently terminally ill and need funds to pay for health care. The industry grew out of the AIDS crisis in the 1980s, but has since expanded beyond sick policyholders. An estimated $13 billion worth of life insurance policies were sold in life settlements in 2005, up from $5 million in 1989 and $200 million in 1998, according to court filings.

States began to regulate the practice in the early 1990s, due to concerns that terminally or chronically ill people are particularly vulnerable to unfairly low prices or fraud.

The case before the Supreme Court began when a Virginia resident lodged a complaint against a Texas-based company, Life Partners Inc., charging that the company paid her only 26 percent of the face value of her $115,000 policy. Virginia law required LPI to pay at least 60 percent to 70 percent, based on her life expectancy.

Life Partners sued to have the Virginia law declared an unconstitutional interference with interstate commerce. While state regulation of insurance is expressly allowed under federal law, Life Partners argued that they aren't in the insurance business, because viaticals are between policyholders and third parties.

Virginia officials responded that viaticals alter the parties to a life insurance policy, among other changes, and therefore are subject to state regulation. A federal district court judge agreed and rejected Life Partners' challenge. The 4th U.S. Circuit Court of Appeals, based in Richmond, Va. upheld that ruling.

The justices' refusal to take the case lets the appeals court's ruling stand.

Read More About Supreme Court Declines to Hear Viatical Settlement Cases...