A recent case to come before the Life Insurance Division of the National Financial Ombud (NFO) highlights the importance of keeping the nominated beneficiaries on your life insurance policies updated.
In a retirement fund, the fund trustees have some discretion over who receives benefits on a fund member’s death. This also applies to any group risk cover you may have through an occupational retirement fund. In the case of a privately-held life insurance policy, however, the question of who receives the insurance payout is clear-cut: it’s the beneficiary/ies nominated by you on the policy.
Life insurance payouts are paid directly to beneficiaries and bypass your estate. They are processed relatively quickly, providing the beneficiaries with much-needed liquidity while the estate is being wound up.
Only if there are no nominated beneficiaries, or the nominations are found to be invalid, will the money be paid into the deceased estate.
For these reasons it is essential that your beneficiary nominations are up to date – in other words, that they accurately reflect the person or people you have chosen to receive the benefit on your death.
The case, according to the NFO, involved a policyholder, Mr X, who had nominated his minor daughter as the beneficiary of his life policy. However, shortly before his death, he appears to have had a change of heart, because he requested a beneficiary nomination form from his broker. The signed form, which replaced his daughter as sole beneficiary with a family trust, was found in Mr X’s desk drawer about two months after his death.
The broker sent the form to the insurer, and within hours of confirming the beneficiary change, the broker informed the insurer of Mr X’s death. The family trust claimed on the policy and the proceeds were paid into the trust’s account.
On learning of the payment to the trust, Mr X’s ex-wife lodged a claim on behalf of her daughter. The insurer declined the claim, saying it had made the payout to the correct beneficiary according to the most recent nomination form. The insurer’s forensic department had found that the signature on the form naming the trust as sole beneficiary was valid.
Mr X’s ex-wife complained to the ombud, contending that her daughter had been the nominated beneficiary at the time of Mr X’s death. The policy was silent on whether the beneficiary nomination had to reach the insurer prior to the claim event.
The ombud ruled that the complaint was best decided by a court of law. However, the complainant appealed the decision and the case went before the NFO’s full appeal tribunal. The tribunal, consisting of three retired judges, overturned the ruling, stating that the complaint “concerned the contractual relationship between the insurer and the insured, to which the trust was not a party”.
It said the word “nomination”, in ordinary language, required communication of the nomination by the policyholder to the insurer. As nominated by Mr X to the insurer, the child was a party to the contract, entitled to be paid. The insurer was instructed to pay the benefit to the child’s guardian, which it did.
Don’t put it off…
In commenting on the case, the Lead Ombud of the NFO’s Long-term Insurance Division, Denise Gabriels, said: “If Mr X’s wishes were to have the proceeds paid to the family trust, he should have submitted his beneficiary nomination to the insurer while he was still alive and not leave it in his desk drawer. If this had been done, the dispute would have been avoided.
“Save your loved ones trouble. Check your beneficiary nominations and that the insurer knows of them and has the contact details for the beneficiaries, especially after a significant life event, such as divorce or the birth of a child, prompting a change in your wishes.”
