When a beneficiary predeceases a life insurance policy holder

March 1st, 2012
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PPS Insurance Company Ltd and Others v Mkhabela (SCA) (unreported case no 159/2011,14-11-2011) (Cachalia JA)

By Dwight Buys

The life assured is the person whose life is insured under a policy. A policy beneficiary is the third person nominated to receive the policy benefits on the death of the life assured, usually the policy owner. It is the policy owner’s prerogative to appoint a beneficiary if he so chooses. A beneficiary appointment is an agreement between the policyholder and the insurer whereby the latter promises to pay the policy proceeds to a particular third party as beneficiary. This constitutes a contract for the benefit of a third party. A beneficiary nomination is usually capable of cancellation by giving written notice to the assurer concerned. The beneficiary under a revocable nomination does not usually hold any rights in the policy, nor may he deal with the policy during the lifetime of the policyholder. Policies normally contain a revocation clause entitling the insured to alter the beneficiaries by giving written notice to the assurer.

The legal consequences of beneficiary nominations under life insurance policies has been discussed previously on several occasions. However, do the insured and the nominated beneficiary understand what will happen to the benefits of that policy should the beneficiary predecease the insured? This article will focus on the decision of the Supreme Court of Appeal (SCA) in the abovementioned case and some of the questions it will consider are:

  • Can the executor of a deceased nominated beneficiary claim the benefits on behalf of the deceased beneficiary?
  • What if the insured should also become deceased after the death of the beneficiary without having nominated someone else as a substitute?
  • Will the proceeds of the policy form part of the deceased estate of the insured because the nominated beneficiary has predeceased him or will the proceeds still be paid to the estate of the nominated beneficiary as per the contract and the initial intention of the insured?

Factual background

Ms Sebata had a life policy issued by PPS Insurance (PPS). She nominated her mother, Helen Mkhabela, as beneficiary of the policy in the event of her death, but reserved the right to change or cancel the nomination at any time. Ms Mkhabela passed away on 26 May 2007. Her daughter, the life insured, died on 12 August 2007, when the proceeds of the policy fell due, but without having nominated another beneficiary. Simon Mkhabela, the respondent and executor of Ms Mkhabela’s deceased estate, claimed the proceeds of the policy in the High Court. The judge reasoned that when Ms Mkhabela died, her daughter’s nomination of her as the beneficiary of the policy ceased to exist and the policy therefore vested in the estate of Ms Sebata. The full court took a different view and held that once Ms Mkhabela accepted her nomination as beneficiary and PPS recorded this, a binding agreement between her and PPS came into effect. On Ms Sebata’s death, so the court reasoned, Mr Mkhabela, as executor of Ms Mkhabela’s estate, was entitled to accept the benefit of the policy. This is what led to the appeal. PPS appealed this reasoning of the court and the case was referred to the SCA. PPS succeeded in its appeal as the court found that because Ms Mkhabela died before her daughter her spes (an expectation) expired at the same time. The nominated beneficiary does not acquire any right to the proceeds of the policy during the lifetime of the policy owner. It is only on the policy owner’s death that the nominated beneficiary is entitled to accept the benefit. Until the death of the policy owner, the nominated beneficiary only has a spes of claiming the benefit of the policy and there was therefore no enforceable right that was transmissible to the Mkhabela estate. The benefit remained with the insured, Ms Sebata, until her death approximately two months later, when it fell into her estate.

Legal issues in dispute

For the nominated beneficiary (Ms Mkhabela): The beneficiary nomination was never revoked, amended nor cancelled during the lifetime of Ms Sebata, even after the death of the nominated beneficiary. The spes that Ms Mkhabela had remained open for acceptance by her executor on the death of Ms Sebata because a contract had been concluded. The agreement between Ms Sebata, Ms Mkhabela and PPS did not terminate on the death of Ms Mkhabela as her executor was a representative of her estate and, as such, could accept benefits on behalf of the estate. The executor was entitled to accept the benefits from the policy on behalf of the deceased beneficiary within a reasonable time.

For the policy owner (PPS and others): The nominated beneficiary had no vested rights to the benefit. Because the nominated beneficiary predeceased the policy owner, the spes that the nominated beneficiary had during her lifetime fell away as a result of her death. The fact that the nominated beneficiary accepted the nomination cannot change the fact that the nominated beneficiary had no rights during the life of the policy owner. It could also be argued that the life assured must die before a life insurance benefit will vest in the person entitled to the proceeds and that, therefore, the condition is only fulfilled immediately after death.

Clearly both parties had valid legal issues worth addressing.

Practical legal point of view

In the case of Pieterse v Shrosbree NO and Others; Shrosbree NO v Love and Others 2005 (1) SA 309 (SCA), the court affirmed that policy benefits payable to a nominated beneficiary who has duly accepted such benefits shall not pass to the beneficiary through the estate of the owner of the policy but will vest in the beneficiary directly. This approach was based on the application of the principles of the stipulatio alteri (benefit in favour of a third party). A stipulatio alteri is defined as a contract in terms of which one party, the promittens, agrees with another party, the stipulans, that he (the promittens) will perform something for the benefit of a third party. To this is added that a third party contract is not simply a contract to benefit a third party but rather a contract between two parties designed to enable a third party to step in as a party to a contract with one of those two (Joubert (Ed) The Law of South Africa (LAWSA) 12 (first reissue) at para 407).

Furthermore, in the case of Hees NO v Southern Life Association Ltd 2000 (1) SA 943 (W) it was held that policy subject to a beneficiary nomination is subject to an encumbrance that can only be revoked by an express change of intention on the part of the insured. Chapter 7 of the policy agreement stated that if the beneficiary nomination was to be revoked, this had to be done in writing and received by the head office of the insurance company prior to the death of the insured. It was further held that a clause in a policy requiring written notice of revocation to be sent to the insurance company exists for the protection of both the policyholder and the insurance company, as well as for the need for certainty. The insured has the right to change the beneficiary nomination. When he chooses to exercise this right it must be done in a manner prescribed by the policy agreement and the insurance company must be made aware of the change. Policy beneficiary nominations do not have to comply with formalities required in terms of the Wills Act 7 of 1953 because when a person purchases a policy he denudes his estate of such money in favour of the recipient insurance company.

Thereafter ownership of such money passes to the insurance company. Prior to its maturity date, the proceeds of the policy do not become an asset in the estate of the policyholder. The insured does, however, have certain rights under the policy, for example to surrender it or to obtain a loan against it. These rights will fall into the estate of the policyholder in the event of his death. The application of the vesting test involves the distinction drawn in South African jurisprudence between vested and contingent rights.

There is no contractual relationship between the insurer and the nominated beneficiary while the insured is still alive. Although the right of a beneficiary is not a vested right, the beneficiary does, however, have the right to not have the prospect of an inheritance frustrated by professional negligence (Ries v Boland Bank Pks Ltd and Another 2000 (4) SA 955 (C)).

In practice, where no beneficiary was appointed, and the insured was the policy owner, the policy will fall into his deceased estate. The nomination of one’s heirs as beneficiaries in the policy document does not entitle the executor to claim the benefit for the estate; instead the deceased’s heirs benefit directly without the funds going through the estate.

In Mooi v South African Mutual Life Assurance Society and Others [2004] 3 BPLR 5519 (TK) it was held that the nomination of the beneficiaries was a stipulatio alteri. So if an insured is, for example, married in community of property and has life policies with nominated beneficiaries on those policies, the proceeds thereof shall not form part of the community estate but shall be paid to the nominated beneficiaries.

In practice, most life policies contain a ‘no rights’ clause. In Warricker and Another NNO v Liberty Life Association of Africa Ltd 2003 (6) SA 272 (W) the contract between the applicant and the insurer contained a clause that the beneficiary would not be entitled to any benefit during the lifetime of the principle life insured.

In Wolmarans en ’n Ander v Du Plessis en Andere 1991 (3) SA 703 (T) the ‘no rights’ clause in the insurer’s contract read as follows: ‘Indien ’n begunstigde benoem word “vir eienaarskap by dood van aansoeker” (kes die bylae), en die aansoeker, word al die regte in hierdie polis vervolgens outomaties op die begunstigde oorgedra.’ Thus the position is that if the contract does not contain a no rights clause, the beneficiary can accept the benefit before the death of the stipulans so that the beneficiary acquires a right that is subject to a negative suspensive condition. On the death of the stipulans it is not necessary for the beneficiary to again accept the benefit. In this case the right to receive the policy benefits will unconditionally vest in the beneficiary at the moment the stipulans dies and not after his death. If the contract does contain a no rights clause, the beneficiary can only accept the offer after the death of the stipulans. The beneficiary’s right to receive the policy benefits will only vest in him once the offer is accepted by him (see M Botha & W Oosthusizen ‘Life insurance and the accrual system: Policies in or policies out?’ (2009) Insurance and Tax Journal 6).

Comment

I agree with the decision of the SCA. While the life insured under a life insurance policy is still alive, the beneficiary has no rights at that stage. Prior cases and legislation are clear on this. The abovementioned set of facts should be carefully considered when advising clients about the consequences should a beneficiary predecease the life insured. The life insured can, should this situation materialise, change his beneficiary nomination by giving written notice to the insurer in question. Alternatively, should the life insured, after becoming aware of the death of the beneficiary under his life policy, require that the proceeds of that policy be paid into his estate, he can simply leave the nomination as is. Furthermore, here there was also no final nomination of the beneficiary, which means that the beneficiary could not accept any benefits during the lifetime of the insured but only thereafter. The previous cases involving the rights of beneficiaries discussed above and the relevant legislation has led me to agree with the decision taken by the SCA.

Dwight Buys LLB (UP) is a trainee legal adviser at Old Mutual Life Insurance Company in Pretoria.

This article was first published in De Rebus in 2012 (March) DR 43.

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