Putting a premium on your life
Most bets are not legally enforceable, but bets against you living or dying when done in terms of a life assurance policy are enforceable. However, there is a caveat: anyone taking out a life assurance bet (contract) on your life must have what is called an insurable interest in your life … or they may also take out a contract to take your life as well!
And do not think this could not happen. Some years ago a couple of Sanlam financial advisers were acquitted on murder charges of having pushed over a cliff someone in whom they had no insurable interest, but to whom they had sold a policy in which they named themselves as beneficiaries. Despite their acquittal, Sanlam refused to pay the benefit to the advisers.
This tricky issue of insurable interest is addressed by the Ombudsman for Life Assurance, Judge Brian Galgut, in his latest annual report.
Effectively, he says, you and your life assurance company are taking a wager on when you will die, become disabled, contract a life-threatening disease or even lose your little toe.
If you do not die, after taking out a policy at age 20, until you are 101, you lose the bet, because you will have paid a lot more in premiums than the benefit that will be paid out. If, however, you take out the policy at age 20 and die the following year, you unfortunately win the bet.
But a lot of people can take out an assurance policy on your life and you may not even know about it. So others are taking the same bet, expecting they will benefit if and when you die.
For this reason, the people who take the wager must have an insurable interest in you; namely, they must stand to lose financially if you die or are disabled.
Judge Galgut says that “both the purpose and the basis of a true contract of insurance is the protection of a genuine insurable interest.
“Should it be found that a purported contract of insurance is not intended to safeguard an insurable interest but is simply payable on the occurrence of an uncertain event, it will not be assurance proper but a wager.”
In such a case, a life assurance company must reject the claim – as Sanlam did with its financial advisers.
Galgut says there is no legislation that defines an insurable interest, but he says whether an insurable interest exists in a given case is usually clear enough.
The obvious cases are insuring your own life, the life of a spouse, a family member, a putative (common law) spouse, a traditional marriage spouse, a cohabitant, any person against whom you may have a right of support, your business partner, your key employees and your debtors.
Galgut says this is not the end of the list, and “where the line is to be drawn remains unclear, especially in relationships between people who are not married, engaged to be married or living together”.
With the relaxation of conservative attitudes over recent decades, his office considers that the concept of insurable interest will be held to embrace such an informal relationship, provided the strength of the bond, the companionship and the measure of emotional support approximate sufficiently to those in the case of married and engaged couples.
Galgut warns, however, that there is another, entirely different aspect of insurable interest that raises some serious questions.
“As the law stands, it is only at the inception of a policy that an insurable interest is required to exist for the contract to be legally enforceable.
“What sometimes happens, however, is that at some later stage the insurable interest ceases to exist, for example where a business partner, whose life is insured by another partner, leaves the partnership. In those cases the policy remains legally enforceable as the law stands, and the policyholder retains full rights to the policy, one being the right to cede it.”
In cases where the policyholder, or the cessionary in the case of a cession, still holds a policy after the insurable interest has ended, it sometimes happens that the life insured becomes concerned for his safety, often for good reason.
In such a case, for all you know the policyholder or cessionary might have a greater interest in your death than your life. Even if your life is not in danger, as the life insured you may justifiably feel it is unacceptable that a person or company with whom you have no ongoing relationship should benefit from your death.
Galgut says his office can do nothing about complaints received from people whose lives have been assured by a policyholder who no longer has an insurable interest.
And while the authorities consider this problem highlighted by Galgut, they should ban the practice, to which most life offices turn a blind eye, of financial advisers preying particularly on older people and naming themselves as beneficiaries on the death of the policyholder.
In many cases these unscrupulous advisers manage to confuse the policyholder about what it means.
Woman changes tune to get premiums back
An unusual complaint to Life Assurance Ombudsman Judge Brian Galgut involved a woman in her fifties, who took out a policy on the life of a man in his sixties. In making the application, she described him as her “boyfriend” and added that they “were dating”. The insurer accepted the application and a policy was issued.
Some four years later, the woman surrendered the policy, contending that there had never been an insurable interest and claiming repayment of the premiums. She claimed that she and the life insured had not been engaged, had not intended to become married and had never lived together, and that she had never been supported by him.
However, the ombudsman was unable to determine, on the information she provided, that there had not been an insurable interest, so her premiums were not repaid.