Lize de la Harpe, Senior Legal Advisor, Sanlam Corporate

Introduction

Life insurance policies commonly entitle the owner to nominate a beneficiary on condition that the nomination will confer no rights on the nominated beneficiary during the owner’s lifetime. The legal nature of such a nomination is a stipulatio alteri.

In this article we will discuss the principle of stipulatio alteri and look at the situation where the nominated beneficiary predeceases the policyholder.

Stipulatio alteri

The common law principle of stipulatio alteri refers to a contract between two persons, but for the benefit of a third person. In the case of a life insurance policy, the policyholder (the stipulans) contracts with the insurer (the promittens) that an agreed offer would be made by the insurer to a third party (the nominated beneficiary) with the intention that, on acceptance of the offer by that beneficiary, a contract will be established between the beneficiary and the insurer.

What is required is an intention on the part of the original contracting parties that the benefit, upon acceptance by the beneficiary, would confer rights that are enforceable by the beneficiary against the insurer – this intention is at the very heart of the stipulatio alteri. The beneficiary, by accepting the benefit, becomes a party to the contract.

Accordingly, on the death of the policyholder the beneficiary will be able to claim the proceeds from the insurer based on the contract of insurance between the deceased and the insurer.

A right or a mere spes to the proceeds?

Before answering this question, it is very important to distinguish between revocable and irrevocable life insurance policies. The reason this distinction is important is because of the fact that the moment of acceptance by the beneficiary determines when his/her rights vests.

Remember, as said above – stipulatio alteri requires that the beneficiary must accept the benefit in order for his right to vest – the beneficiary must therefore accept the benefit to become a party to the contract.

Where the beneficiary nomination is revocable, there can be no acceptance by the nominated beneficiary until the policyholder dies without having revoked such nomination. Whilst the policyholder is alive, the policy remains the property of the policyholder and he has, subject to the terms of the policy, the full right to deal with it as he likes. The nominated beneficiary therefore does not acquire any right to the proceeds during the policyholder’s lifetime – he/she has a mere spes (“expectation”) to the proceeds at the death of the policyholder.

Where the beneficiary nomination is irrevocable, acceptance may take place at any time before or after the policy has become payable, but must take place within a reasonable time which probably runs from the moment the policy becomes payable. Just remember a revocable nomination cannot be accepted before the policy becomes payable and must take place within a reasonable time afterwards, failing which the third-party nomination will fail. Accordingly, if the beneficiary nomination is irrevocable, and the nominated beneficiary dies before accepting the benefit, his or her executor may accept the benefit on behalf of the deceased.

Case law

In the matter of PPS Insurance Company Ltd & others v Mkhabela [2011] JOL 28083 (SCA) the deceased had nominated her mother as the beneficiary of a life insurance policy, reserving the right to cancel or change her nomination at any time. The beneficiary predeceased the deceased by three months. The deceased had not nominated another beneficiary before her death.

The executor of the mother’s estate claimed the proceeds of the policy in the High Court. The High Court dismissed the claim with costs and directed that the proceeds of the policy be paid to the third appellant, as executor of the insured’s deceased’s estate. The court reasoned that when the beneficiary died, her daughter’s nomination of her as the beneficiary of the policy ceased to exist. The policy therefore vested in the deceased’s estate and not her mother’s.

The matter proceeded to the Supreme Court of Appeal which held that a nominated beneficiary does not acquire any right to the proceeds of a policy during the lifetime of the policy owner. It is only on the policyholder’s death that the nominated beneficiary is entitled to accept the benefit and the insurer is obligated to pay the proceeds of the policy to the beneficiary. Until the death of the policyholder, the nominated beneficiary only has a spes of claiming the benefit of the policy. It follows that if the nominated beneficiary predeceases the policy owner, she would have had no right to any benefit of the policy at the time of her death.

Conclusion

Nominating a beneficiary on a policy has various advantages, including but not limited to –

• Ensuring that the policy proceeds are immediately made available to the beneficiary on the death of the policyholder. The beneficiary therefore does not have to wait until the deceased estate is wound up; and

• Keeping the policy proceeds out of the deceased estate.

It is however very important to keep your beneficiary nominations up to date. If no beneficiary has been nominated or the beneficiary predeceased the policyholder, the proceeds will be paid to the policyholders’ deceased estate, which in all likelihood will defeat the purpose for which a beneficiary was nominated in the first place.

ENDS