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Rights of nominated beneficiary

If a third party is nominated as a beneficiary in a life insurance policy and the policy wording reserves the insured’s right to cancel or change the beneficiary nomination, the nomination lapses if the beneficiary dies before the policyholder.

In PPS Insurance Company v Mkhabela (1959/2011) [2011] ZASCA 191, Ms Sebata was the owner of a life policy issued by PPS Insurance. She nominated her mother as beneficiary in the event of her death, but reserved the right in the policy to change or cancel the nomination ‘at any time’. Her mother predeceased her and the policyholder died soon afterwards without nominating another beneficiary. The executor of the mother’s estate claimed the proceeds.

The judgment is worth noting for two reasons. Firstly, the decision is correct and will guide long-term insurers in relation to similar facts. But some of the reasoning is not correct and not all the remarks in the judgment should be accepted as good law.

The court correctly held that where an insured expressly reserves the right to change or cancel the nomination, the nominated beneficiary has no claim to the benefits under the policy until the insured’s death. If the insured subsequently chooses another beneficiary and revokes the first, the first nominee has no rights even if that nominee accepted the benefits of the nomination. The policy owner’s mother had an expectation and not a right in relation to the benefits. Even though the nomination was not revoked, it had no content until the death of the policyholder.

The nomination of a beneficiary is a contract for the benefit of a third party. The insurer and the policyholder agree between them that the nominated beneficiary can acquire rights under the policy in certain circumstances. But the court wrongly said: “It is well established that a nominated beneficiary does not acquire any right to the proceeds of the policy during the lifetime of the policy owner”. Until the death of the policy owner, so the court said, the nominated beneficiary only has an expectation of claiming the benefit of the policy and has no vested right to the benefit. That statement is not correct in all circumstances. Where a contract is made for the benefit of the third party, the third party can acquire rights by accepting that benefit with all parties’ consent. Take, for instance, the situation where the policyholder is the husband in a divorcing couple. As part of the divorce settlement, the husband nominates his wife as beneficiary and, in terms of the settlement agreement, she accepts that nomination. If there is no provision in the policy reserving the right to change or cancel the nomination, or if by agreement between insurer, policy owner and spouse it is agreed that the nomination is irrevocable, the wife will acquire a vested right and not an expectation. There are other circumstances in which the beneficiary can accept the benefit and acquire a vested right. The quoted statement by the court should not be taken as the legal position in all circumstances therefore.

In order to avoid confusion, life insurers should include a provision in each policy that the policy owner can change or cancel the nomination at any time and that the beneficiary acquires no vested rights during the lifetime of the policy owner unless the parties agree to do so in writing.

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