1301. If you die insolvent, what happens to your life insurance policy?
June 2005 – Issue 70
Anyone with dependants should take steps to provide for them financially, in the event of his or her death. Of vital importance in this regard is adequate life insurance. Another risk - particularly acute for anyone who has their own business - is that of insolvency. A double disaster is to die insolvent, that is to say with debts that are greater than one’s assets.
If a person becomes insolvent, creditors are entitled to attach his or her property, with the exception of a few categories of assets which enjoy protection from attachment in terms of the Insolvency Act. What happens to the proceeds of a life insurance policy: are these proceeds protected or can they be attached by creditors of a deceased insolvent? Of course, attachment by creditors would be catastrophic for the deceased’s dependants.
The SCA resolves two conflicting High Court decisionsIn Shrosbree NO v Love 2005 (1) SA 309 the Supreme Court of Appeal resolved two conflicting High Court judgments in this regard, both decided in 2004, which created great uncertainty amongst life assurers. Both High Court judgments concerned insolvent deceased estates, where the deceased had taken out a life insurance policy and had nominated a beneficiary in terms of the policy. The one High Court decision held that section 63 of the Long-Term Insurance Act 52 of 1988 has the effect that the proceeds of the policy, save for R50 000, form part of the insolvent estate, and must therefore be used to pay creditors; the other decision held that the proceeds of the policy must go to the nominated beneficiary.
In a consolidated appeal from these two High Court decisions, the Supreme Court of Appeal held that where a life insurance policy nominates a beneficiary, the proceeds of the policy are payable directly from the insurer to that beneficiary. Section 63 of the Long-Term Insurance Act, said the court, does not divert the proceeds of a life insurance policy from the nominated beneficiary to the insolvent estate.
A life policy with a nominated beneficiary is a stipulatio alteriThe Supreme Court of Appeal held that when a person takes out a life insurance policy and nominates a beneficiary for that policy, this constitutes a stipulatio alteri, that is to say, a contract for the benefit of a third party. That nomination can be revoked by the insured party at any time during his or her lifetime. If on death, the nomination has not been revoked, the insurer must make an offer to the nominated beneficiary. On acceptance, that beneficiary becomes a party to the insurance contract and acquires an enforceable right against the insurer to require payment of the proceeds of the policy. Section 63 of the Long-Term Insurance Act does not regulate the payment of the proceeds of the policy because the proceeds of the policy go directly to the beneficiary, and not to the estate of the deceased.
Estate and tax-planning implicationsThe estate and tax-planning moral of the judgement is that it is highly advisable, when taking out a life insurance policy, to nominate a beneficiary (an individual or a family trust) rather than allow the proceeds of the policy to be an asset in your deceased estate. If your deceased estate turns out to be insolvent, and you have nominated a beneficiary, the proceeds of the policy will not fall into your insolvent estate, but will be paid directly by the insurer to the nominated beneficiary.
PricewaterhouseCoopers
Estate Duty Act:S 3(3)(a)
Editorial comment: An added advantage is that the executor’s remuneration is not payable on the proceeds of a life policy that go directly to a nominated beneficiary. Such a policy does however constitute deemed property for Estate Duty purposes in terms of Section 3(3)(a) of the Estate Duty Act, subject to any applicable exemptions.
