Risk-only life policies with a beneficiary clause

Risk-only life policies with a beneficiary clause, the proceeds thereof do not form part of the deceased’s estate, neither the joint estate even if the deceased was married in community of property.

Upon death, the question of which property formed part of the deceased’s estate during his life time is inevitable, so does the question of which property formed part of the joint estate where the deceased was married in community?

In the matter between Naidoo v Discovery Life Limited & Others (202/2017) ZASCA 88

(31 May 2018), the main issue was whether the proceeds of risk-only policy containing a beneficiary clause, formed part of the joint estate?  And if so, whether the nomination of beneficiaries by the deceased without the consent of the surviving spouse amounted to an alienation of property which is prohibited in terms of section 15 (2) (c) Matrimonial Property Act 88 of 1984 (hereinafter “the Act”)?

It was common cause that the appellant, Ms. Vavanthi Naidoo and the late Merglen Naidoo were married in community of property in 1996. It was also common cause that in 2002, the deceased took out life assurance policy with Discovery Life Limited in terms of which the deceased was the principal life insured and owner thereof.

On the inception of the policy, the deceased nominated the appellant as the beneficiary of the proceeds in terms of the policy. However in 2011, the deceased decided to remove the appellant as a beneficiary, without her knowledge. He substituted her by nominating his parents and siblings as the new beneficiaries. A year later—that was 2012, he passed way.

Pursuant to his death, Discovery Life Limited fulfilled its obligation in terms of the policy by making payment of the proceeds due to the new beneficiaries. It was only then that the appellant learned that the deceased had removed her as a beneficiary.

The appellant formed the view that the proceeds of the policy belonged to the join estate, since she was married to the deceased in community of property. This prompted her to institute legal proceedings in the Gauteng Local Division of the High Court, Johannesburg, seeking an order inter alia to the effect that the proceeds of the policy formed part of the joint estate and that Discovery Life Limited pay such proceed to the joint estate.

In light of the relief claimed against Discovery Life Limited, the new beneficiaries were joined by Discovery as the co-respondents in the matter. It appears that Discovery Health Limited was intending to proceed with a claim for unjustified enrichment against the co-respondents, in the event that the relief against it were to succeed.

The High Court considered the substance of risk-only life policy, with a beneficiary clause and determined that this type of policy constitutes a stipulation alteri contract (a contract for the benefit of a third party).  As such the court held that the proceeds of the policy did not form part of the deceased’s estate, neither the joint estate. The Court held further that the substitution of beneficiaries by the deceased without the written consent of the Appellant did not constitute an alienation in terms of the Act.

The ruling of the High Court was subject to an appeal at the Supreme Court of Appeal (hereinafter “the SCA”).  The SCA confirmed the High Court ruling. It found that the policy holder (“the deceased”) contracted with the insurer to the effect that an offer will be made by the assurer to a third party with the intention that on acceptance of that offer by the beneficiary, a contract will be established between the beneficiary and the insurer.

The SCA also found the following: the proceeds of the policy were payable to the beneficiary upon death of the principal life insured, proceeds were immediately made available to the beneficiaries without the beneficiaries having to wait for the deceased’s estate to wound up, the proceeds did not form part of the deceased’s estate for the purposes of calculating the executor’s remuneration, the policy had no surrender value and the proceeds could have never been paid to the policy holder during his life time.

The SCA, same as the High court, ultimately ruled that the proceeds of the policy did not form part of the deceased’s estate neither the joint estate. Having determined that the policy did not form part of the deceased’s estate neither the joint estate, the SCA held that the nomination of new beneficiaries without the consent of the appellant did not amount to an alienation and as such section 15(2) (c) of the Act was not applicable.

Perhaps an interesting issue which both the SCA and the High court were not call upon to decide is whether the payment of premiums without a spousal consent would have amounted to an alienation in terms of section 15(2) (c) of the Act? In light of the fact that the deceased and the appellant were married in community of property and as such the money utilized to pay for the premiums was part of the joint estate.

By
Jeffrey Maluleke
jeffrey@dyason.co.za