Priya Rajah of the National Financial Ombud Scheme

The start of a new year is a good time to check that one’s financial affairs are in order and nominating beneficiaries on your life insurance policies will ensure that the proceeds are paid timeously to the intended parties.  

When there is a valid beneficiary nomination on a policy, the policy does not form part of the estate and the proceeds upon death are paid directly to the beneficiary, thereby saving time and money on executor fees.

The following summary of a case shared by the Lead Ombud of the Life Insurance Division and ruled on by the appeal tribunal of the National Financial Ombud Scheme South Africa (NFO) demonstrates the importance of ensuring that your beneficiary nominations have been communicated to the insurer. 

The policyholder, referred to as Mr X for the sake of confidentiality, had nominated his minor daughter and only child as the beneficiary of his life assurance policy.  

However, approximately two months after Mr X’s death, the insurer received an updated beneficiary nomination form from Mr X’s broker substituting the child’s nomination with that of a family trust with  different beneficiaries within it. 

Within hours of sending confirmation of the beneficiary change, the insurer was informed by the broker of the death of Mr X.  Not long thereafter, a claim was lodged by the trustees howeverf the family trust and the benefit proceeds were subsequently paid into the trust’s account.

Mr X’s ex-wife learnt of the policy and the child’s nomination as beneficiary after the payment to the trust, despite having enquired from Mr X’s broker shortly after his death about the details of policies on which her daughter was a beneficiary. 

The broker had claimed that he was bound by a confidentiality clause and had to be directed by the trustees of the trust and executor before he could divulge information, although he knew about the daughter’s nomination as beneficiary at the time.  

Mr X’s ex-wife lodged a claim on behalf of her daughter, however, the claim was declined by the insurer on the basis that it had paid to the correct beneficiary, and that the daughter was not entitled to the benefit.

The insurer relied on the investigation report of its forensic department that found that the signature on the beneficiary nomination form naming the trust as sole beneficiary was valid.

The signed form had apparently been found by the executor and Mr X’s assistant in a desk drawer of the deceased when they were clearing up his belongings. The broker, who was also a friend of the deceased, had reported to the investigators that the deceased had requested a beneficiary nomination form months prior to his death.  He was aware that Mr X’s relationship with his ex-wife and daughter was strained.   

The complainant, the ex-wife of Mr X on behalf of the daughter, contended that the insurer had not fulfilled its contractual obligation to pay the benefit to the nominated beneficiary upon the death of the life assured, whom she argued was the daughter.  

Unlike many other life insurance policies, the policy in question was silent on whether the beneficiary nomination had to reach the insurer prior to the occurrence of the claim event.  

The ombudsman ruled that the complaint was best decided by a court of law as the decision could likely affect the rights of a third party, namely the trust, who was not a party to the dispute and over which the ombudsman had no jurisdiction. With this outcome, the complainant lodged an application for leave to appeal the ruling, which was granted.

The NFO’s full appeal tribunal consisting of three retired judges overturned the ombudsman’s ruling, stating that “the true 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, requires communication to the insurer of the nomination. Even if it was not explicitly included in the contract, it was implied. 

The child became entitled to become party to the policy and enforce its terms on the death of Mr X and she was not deprived of that right by the insurer’s purported substitution. She exercised that right once it became known to her, and she thereby became a party to the contract, entitled to be paid.  The insurer was instructed to pay the benefit under the policy to the child’s guardian, to which they obliged.

If the deceased’s wishes were to have the proceeds paid to the family trust, he should have submitted his beneficiary nomination to the insurer whilst he was still alive and not leave it in his desk drawer. If this was done this dispute would have been avoided. 

Save your loved ones trouble, it does not take up much time. Check your beneficiary nominations and that the insurer has record of it and contact details for the beneficiary, especially if a significant life event has recently occurred.