Beneficiary nominations on life insurance policies can be a natural person, a trust, payable to the deceased estate, as per my will, to an organisation and so many others.
The purpose of this article is not to debate the legality of whether the beneficiary must exist at the time or not or, and all the other contractual issues. We are focusing only on minors being nominated as beneficiaries.
A beneficiary nomination is generally in favour of a third party. In essence, a stipulatio alteri. The policyholder is the stipulator and the insurer the promisor of the benefit which is the proceeds of the policy.
Where beneficiaries are nominated, the Insurer will pay the nominated beneficiary. The contract obligates the Insurer to pay the nominated beneficiary. Where there is no nominated beneficiary, it will automatically vest in the owner of the contract – who is the deceased – and hence will automatically pay the deceased’s deceased estate.
If the nomination is either ‘my estate’ or ‘as per my will’, the insurer will pay the deceased estate. If the beneficiary is my mom, my dad, my spouse etc, you would agree that the insurer will pay these nominated beneficiaries.
Money that forms part of the deceased estate:
When a person dies, all their assets belong to the deceased’s deceased estate. This is cash in bank accounts, unit trusts, shares, fixed assets and everything else that the deceased may have owned. This could also be money paid out of life insurance policies if, the nominated beneficiary was the ‘estate’ or ‘in terms of my will’.
The statute that regulates assets in the deceased estate is The Administration of Estates Act. (TAEA for ease of reference)
The objective of the TAEA is:
“To consolidate and amend the law relating to the liquidation and distribution of the estate of deceased person, the administration of the property of minors and persons under curatorship, and of derelict estates to regulate the rights of beneficiaries under mutual wills made by any two or more persons; to amend the Mental Disorder Act, 1916; and to provide for incidental matters.”
The above makes reference to the assets of the deceased estate. Clearly then, the TAEA only governs assets (including money) in the deceased estate.
The TAEA has restrictions when it involves assets (which include money) that are to be distributed to minors (anyone below the age of 18).
Section 43 of the Act contains the restrictions referred to above and, in summary: the executor shall pay to the Master any money which any minor is entitled according to any liquidation or distribution account in the estate of the deceased.
[It is important to read the whole section to understand all the requirements, it is summarized in this article]
The above section 43, ensures that, where the deceased estate has money that devolves upon a minor, it will be transferred to the Guardian Fund.
If your aim is have policy proceeds paid into the Guardian Fund for the benefit of a minor, the nomination has to stipulate that proceeds must be paid into the estate. The fact that this is something I would not recommend is irrelevant.
Life Insurance beneficiary nominations
As briefly mentioned above, a life insurance contract is a contract between the insurer and the policyholder and, is a promise by the insurer to pay the agreed proceeds to the party entitled thereto. The person entitled thereto can be a non-contracting party, such as a minor.
Now, we all know that a minor does not have contractual capacity. The nomination of a minor as a beneficiary does not however require the minor to enter into a contract and therefore contractual capacity does not apply.
If the contract is a promise by the insurer to pay the 3rd party, which is the nominated beneficiary, can we agree that the proceeds will pay the nominated beneficiary and that it will not pay out to the deceased estate (unless this is the nominated beneficiary).
The mere fact that the nominated beneficiary is a minor does not and, cannot deflect from the above common law.
If the proceeds are not paid into the deceased estate where, the provisions of The Administration of Estate Act come into play, then surely money cannot be paid into a Guardian Fund?
An insurer is not obligated at all to pay into the Guardian fund but, is obligated to pay the nominated beneficiary even though it is a minor. To pay a party that is not the nominated beneficiary, would the insurer not be contravening the stipulatio alteri principle?
Of course, because the minor has no contractual capacity, it is the guardian (not guardian fund) that will be contracting on their behalf. A bank account that has to be opened in the name of the minor has to be transacted with the guardian, any transactions have to be concluded by the guardian (not the guardian fund). It may even be that the Guardian receives the proceeds on behalf of the minor. A risk!
Many insurers have an in-house beneficiary fund (which is not a Guardian Fund). Policyholders are encouraged to have proceeds for minors paid into the beneficiary fund instead, to protect minors from possible greedy hands of their guardians.
This article is to merely assure Financial Planners, who are still uncertain of nominating minors as beneficiaries, that insurers are not obligated to pay policy proceeds to a Guardian Fund.
Where a policyholder has nominated their Estate or In terms of my will as a beneficiary, the insurers are obligated to adhere to the contract and pay the deceased estate. This is now money in the deceased estate and as per the TAEA, the proceeds will be transferred to the Guardian Fund where, according to the terms of the will, any such money devolves upon a minor.
A word of warning! Ensure your utmost care when advising a client to nominate a minor as a beneficiary. There are many risks to this advice and I encourage all Financial Planners to research all the potential pitfalls. There are other ways of benefiting a minor where one can ensure that the minor benefits and not other unintended parties.
Any different thoughts or if anyone would like to add onto my understanding, all welcome