WHO IS REALLY ENTITLED TO THE BENEFITS UNDER A LIFE INSURANCE POLICY?

In the back of my mind I can still hear my Financial Advisor stating the importance of nominating a beneficiary for my life insurance policy.  Nominating a beneficiary on your policy assures you of where the sum assured (the amount for which insurance was taken out) will go after your passing, instead of just being pooled together at random with the other funds in your estate. 

The beneficiary of a life insurance policy becomes entitled to the benefit under the policy only upon the death of the policy holder and not prior to this event occurring.  This makes sense right, as the policy holder’s life is insured by the policy. 

However, uncertainty creeps in when events take a turn for the unexpected.  What happens should the beneficiary predecease the policy holder?  In this instance the policy holder will have to appoint a new beneficiary, after which matters will return to the status quo.  Unfortunately, many people pay attention to their policies only when they sign up and never revert back to them for the servicing thereof, a habit which is very important, as you will see below.  The purpose of this article is to reveal the consequences should a beneficiary predecease the policy holder, who in turn does not nominate a new beneficiary to replace him or her.  This issue recently landed in court, in the case of PPS Insurance Company v Mkhabela (159) of 2011, where even the judges had to consider it carefully.  The case can be summarized as follows:

Facts:

Ms Sebata was the owner of a life insurance policy issued by PPS Insurance.   She nominated her mother, Ms Mkhabela, as the beneficiary of the policy in the event of her death.  Ms Mkhabela passed away on 26 May 2007, predeceasing her daughter, the policy holder.  Not long thereafter, Ms Sebata also passed away on 12 August 2007.  There was thus no beneficiary nominated when the proceeds of the policy fell due on Ms Sebata’s death, as her mother had predeceased her.  The executor of Ms Mkhabela’s estate claimed the proceeds of the policy in the High Court.

Legal Question:

Did the right to the proceeds/benefit of the policy vest in Ms Mkhabela, and therefore in her estate, prior to the death of the policy holder?

Court of first instance:

The judge reasoned that Ms Sebata’s nomination of her mother as the beneficiary of the policy ceased to exist upon Ms. Mkhabela’s death and that the proceeds therefore vested in Ms Sebata’s estate.  The claim was dismissed with costs.

Full court:

The executor of Ms Mkhabela’s estate then appealed against the ruling of the court of first instance.

The full court held that as Ms Mkhabela had accepted her nomination as beneficiary, a binding agreement came into effect between herself and PPS Insurance.  This agreement was regarded as a stipulatio alteri – an agreement for the benefit of a third party – which created a spes for Ms Mkhabela, which spes was to become a right upon the death of Ms Sebata.  As Ms Sebata had not revoked the nomination, the “agreement” remained a valid agreement.  The court accordingly ruled that Ms Mkhabela’s estate was entitled to the proceeds of the policy upon Ms Sebata’s death.

Supreme Court of Appeal:

The executor of Ms Sebata’s estate pursued the case and appeal was lodged against the judgment of the full court.

The SCA held that the full court was correct in that Ms Sebata’s nomination of her mother as beneficiary of the policy was a contract for the benefit of her mother (third party), which benefit was capable of being accepted upon the death of the policy holder.  However, the full court erred when it held that Ms Mkhabela’s acceptance of her nomination had legal significance and force. 

The court held that a nominated beneficiary only acquires a right to the proceeds of a policy upon the death of the policy holder, prior to which the beneficiary only has a spes (an expectation) of claiming benefit of the policy. Should the nominated beneficiary die before the policy holder, the spes falls away, irrespective of whether the beneficiary accepted the nomination or not.  Consequently, no right to the proceeds vested in Ms Mkhabela (her estate in this case). The benefit remained with the insured and therefore vested in her estate upon her death.

The appeal succeeded with costs.

From the above it is clear that, should the beneficiary predecease the policy holder, who then does not replace the deceased with a new beneficiary, the insurance company will pay out the benefits under the policy to thepolicy holder’s estate.