Transferable Insurance Policies (TIPS): Definition and How They Operate

Julia Kagan is a seasoned financial and consumer journalist, formerly serving as a senior editor for personal finance at Investopedia.

What Exactly Are Transferable Insurance Policies (TIPS)?

Transferable Insurance Policies (TIPS) refer to life insurance contracts that enable the policyholder to transfer ownership to an investor. In this arrangement, the original owner sells the policy at a discounted price relative to its face value. The buyer then assumes responsibility for paying future premiums and ultimately receives the death benefit when the insured individual passes away. This process is also commonly known as a viatical settlement.

How Transferable Insurance Policies (TIPS) Function

TIPS guarantee the principal amount much like bonds but have an uncertain maturity date. Due to their discounted sale price, these policies often yield higher returns. While they are shielded from external risks such as interest rate changes, they carry the risk of delayed maturity—the longer the insured lives, the lower the investor’s return.

There are two main categories of TIPS: viaticals and life settlements. Both operate similarly but differ in expected duration. Viaticals involve policies on terminally ill individuals with life expectancies around two years, whereas life settlements pertain to senior policyholders with life expectancies ranging from two to fifteen years.

Landmark Supreme Court Decision

In 1911, the U.S. Supreme Court, in Grigsby v. Russell, affirmed the right of individuals to sell their life insurance policies. The court emphasized that life insurance should possess the attributes of property, stating, "Denying the right to sell except to those with a vested interest significantly reduces the contract’s value to the owner."

The concept of policy transfer gained traction in the 1980s, particularly among AIDS patients who sold their policies to finance medical care.

Currently, at least 43 states have enacted regulations governing viatical settlements to prevent speculative buying practices by syndicates. According to the Life Insurance Settlement Association, "Thirty states mandate a two-year waiting period before a policy can be sold, eleven states require five years, and Minnesota enforces a four-year waiting period. Exceptions exist for terminally or chronically ill owners, divorce, retirement, or disability cases allowing earlier sales."

States like Michigan and New Mexico regulate only viatical settlements, while Alabama, Missouri, South Carolina, South Dakota, Wyoming, and Washington, D.C. do not regulate either viatical or life settlements. Most unregulated states and those regulating only viaticals, except Missouri—which has a one-year contestability period—enforce a two-year contestability period under general insurance laws, as noted by LISA.

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