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Failed marriages create life insurance minefield

The high divorce rate in New Zealand is a reminder of the need to get life insurance policy ownership right, advisers at a OnePath seminar in Auckland were told yesterday.

Thursday, February 23rd 2012, 6:30AM 3 Comments

by Niko Kloeten

Kim Fitzgerald of OnePath said advisers need to ask a lot of questions of clients to make sure the ownership structure of their life insurance policies suits their individual circumstances, otherwise things can get messy.

"If the wrong person owns the contract it can create problems for all sorts of reasons.   There are a lot of cases we hear about where the only people that make any money out of a life insurance contract are the lawyers because it's been set up wrong."

Fitzgerald said there are a number of options for ownership, with different advantages and disadvantages for each.

These include the insured person owning his own policy, spouses owning each other's policies, two or more people having a jointly owned policy, or a person's policy being managed by a trustee of a trust (trusts themselves are not classed as ‘people' and therefore can't own policies).

Owning your own policy means it becomes part of your estate when you die, giving the chance for it to be contested by a vengeful relative, he said.

However, he said having it owned by your spouse, or jointly owning a policy, could lead to major problems if you break up, which a growing proportion of marriages do.

"There's a 50% chance the relationship you are sitting working with isn't going to be there down the track," he said.

"When the relationship is gone and the ownership is gone with it, how are you going to get the money when you need it?"

Fitzgerald said for example that a vengeful ex-wife could cancel her ex-husband's policy, leaving him unable to get new cover due to a "bum ticker" or other health or age-related problems.

He also warned of the risks associated with the rising number of mixed households, saying step-parents are more likely to pocket the payout themselves rather than it going toward the biological children of the deceased.

To address this problem parents could have their life insurance policy owned by trustees of a trust, but they must make sure the children are listed as beneficiaries of the trust, he said.

Niko Kloeten can be contacted at

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Comments from our readers

On 22 February 2012 at 8:35 am CS said:
Why don't we have the option yet of setting life policies up in an insurance specific trust to enable the beneficiaries of the policy to be agreed in law at the start of the policy. Doing this removes the issue of funds going to an estate, probate issues etc. Joint policies can have survivor clauses built in, and the money goes to the right people at the right time.
In the absence of this, are we advising people of the necessity to arrange a will when taking life insurance?
On 24 February 2012 at 1:21 pm Lindsay said:
CS needs to take a better look
If you arrange a policy and don't stress the importance of a will then there is a risk
Where they divorce it is a nightmare.Some companies allow a lapse for an hour and revival in the proper name. Some don't. And then you have a life insured, and the owner structure all wrong, with the benefits payable to old spouse and new partner.
Most times the people are co-operative, but sometimes they are not and then it all can turn to manure
Trying to tidy one right now. Could do the industry standard and re write it, but one of them has taken up smoking. Perhaps I should lie
On 24 February 2012 at 2:48 pm MikeNaylor said:
One of the basic problems in NZ is that the local industry and their policy forms fail to distinguish between the 'beneficiary', the 'life insured', vs the 'owner' (as Kim Fitzgerald fails to do). These three are different under law, and structuring the 'owner' as distinct would clarify a number of control questions. Another problem is the failure to review policies periodically. Similarly to debate use of 'current wife' as the beneficiary. These are areas where good AFAs can add real value.
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