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Nominated beneficiaries and estate processes

We've seen the various discussions on nominated beneficiaries and the withdrawal of this with Partners Life some years ago.

Saturday, January 27th 2024, 7:46AM

by Jon-Paul Hale

A little while ago, I had a case with nominated beneficiaries, and due to fraud by one of the beneficiaries, the insurer had to pay the claim twice. The situation is being pursued for fraud, and the Police have been involved in this process. This is the last update I had.

I commented on the article on Good Returns with Partners Life withdrawing this at the time, stating that there will be cases where the insurer has to pay this twice, and the example given is what happened here.

This situation raised a few things that most using nominated beneficiaries aren't aware of.

The first is that the insurer must communicate with the policy owner before paying the claim(s) to the nominated beneficiaries.
* This is basic policy ownership administration.

This is for two reasons:

  1. To ensure that the insurer's actions are not depriving the creditors of the estate of money that the estate is obligated to pay. Ie: debts like mortgages and loans and funeral expenses.
  2. To ensure that the wishes of the owner/estate after the claimable event remain in line with the pre-signed nominated beneficiary form.

The reality is the nominated beneficiary process is a memorandum of wishes and not the "cast in stone" document most believe it to be.

Before you comment, I like the idea of nominated beneficiaries, in principle, it makes things more transparent, but it has its issues.

The potentially better approach is to utilise the transfer of rights process Fidelity Life had. However, this form has also changed since it was introduced, so the current iteration isn't as strong.

  • The original form had sign off by both the owner and the transferee, meaning that it needed sign off to undo it. Making it stronger than the Nominated Beneficiary form that the owner could revoke.
  • The current forms don't have this, with only the policy owner(s) signing off. Meaning that it's not as secure as the old method and more like a living benefits nominated beneficiary form along side the life cover one Fidelity Life have.

I don't know the reasoning for Fidelity Life's change here, but it needs to be returned to the transferee signing off to increase the security of the payment intent.

  • The transferee was needed to sign off on the return of the cover allocated under the assignment.

Why would you use the fully signed transfer of rights form over the nominated beneficiary process?

One reason; security of payment(s).

For something like a mortgage or debt, maybe business assurance coverage, kids' education, the secret second family, or any such situation the client wants to sorted.

In other situations where you have existing cover that you can't restructure. Say the AIA issue of being unable to split/upgrade legacy policies without repricing or underwriting. (Not that AIA have nominated beneficiary options presently, but this is a use case for legacy policy management, aka policy splits for relationship splits)

Being able to assign portions of the cover securely to specific beneficiaries becomes a valuable aspect of policy administration.

There may be a debt to a trust or family member (or friend) that needs accounting for, and the surviving family (owner)/executor is potentially hostile to this happening.

It may be that you need business assurance for share purchase, and the client cannot take new cover, but you can repurpose part of the existing cover with assignment without splitting coverage onto different policies.

The reality of policy servicing is that many policies do have the flexibility to be tailored to a client's changed situation without moving and re-underwriting them.

Unfortunately, the reality is most look to underwrite new cover as the easy answer. Often for good reasons like improved cover, at the same time underwriting new cover for old has medical disclosure and terms risks too.

In our more regulated environment, focus on things relating to the replacement of coverage is being looked at much closer.

Keep this in mind when you sign off on replacement policy advice that the existing cover wasn't suitable for the client's needs, because it may well have been with some attention to this sort of administration restructure it could be been made suitable for the client’s needs.

The reality of many of the policies we put in place is they will outlast us, and the administration around them for claim in the future depends on the advice we provided today. Because you may not be here tomorrow to follow through on the promises you’ve made to your client one how it works.

How does your advice fare if you’re not there to interpret things?

Tags: Jon-Paul Hale

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