When a couple go through a separation there are a myriad of legal aspects to consider. Separation can be a difficult and tumultuous time. Many people overlook the very important aspect of jointly held life insurance policies, a simple mistake with catastrophic consequences, writes Senior Associate, Lucy McPherson.
Many of our clients find going through a separation not only emotionally draining but also overwhelming from a financial and legal point of view. We find that many people overlook their life insurance policies at a time of separation. Let’s face it, not many of us like to think about our impending demise. If you don’t like to think about your own death, you are not alone. Death is not a pleasant subject and life insurance raises issues relating to our own mortality. We have had many clients tell us that they “don’t want to think about those sorts of things” as they “may be manifesting the inevitable”.
The ramifications of not reviewing your life insurance policy at the time of separation can be disastrous to your overall estate plan and the loved ones you leave behind.
Let us set out an example for you to highlight just how catastrophic this sort of situation can become:
- A man and woman meet. They fall in love. They purchase a property together in joint names. Upon acquisition of the property, the parties organise their financial and personal affairs by purchasing a jointly held life insurance policy and executing Wills to benefit each other.
- The couple continue to live together harmoniously. They become financially dependent and mutually supported each other during difficult times like illness and unemployment. Each party make varying contributions to the household at different times including to mortgage repayments and premiums on the jointly held life insurance policy.
- Twenty or so years pass, things become bitter and the couple separate. Upon separation the couple enter into an agreement to deal with their interests in the jointly held property and some bank accounts. No one thinks to consider the jointly held life insurance policy. The woman pays the man a sum of money pursuant to their agreement and she retains the real property. The couple go their separate ways.
- The man meets another woman, enters into a relationship and updates his Will and superannuation nomination to include his new spouse as beneficiary. He marries his new spouse; they have a couple of kids and live happily for a few years. The man subsequently dies suddenly without assigning the jointly held life insurance policy, which is now worth over $1,000,000.
- As the life insurance policy was jointly held by the couple who originally purchased the policy, and the policy was not transferred nor assigned prior to the date of death, the entitlement to the policy automatically reverts to the joint owner (the first spouse) on the death of the other, without reference to the Will or the estate.
- The first spouse receives the entire life insurance payout, having the effect of completely disregarding the interests of the new spouse and children.
The above example can have disastrous ramifications for the spouse and children of the subsequent relationship, who are likely the parties in greatest need of protection. Whilst there is legislation in New South Wales that allows a spouse and children to bring a claim on the life insurance policy as the “notional estate” of the deceased person, this legislation does not exist in any other state or territory of Australia. Further, the application involves protracted and expensive litigation in the Supreme Court which is best avoided, if possible.
Where a life insurance policy is held jointly between two parties, the ownership of the policy automatically reverts to the surviving owner on the death of the other.
How could this have been avoided? Usually the policy terms will clearly stipulate the steps required to be undertaken in order to transfer or assign ownership of the policy. The assignment of the ownership of the policy is not effective at law unless strict requirements are met, including:
- the assignment must be by memorandum of transfer in the form prescribed by the regulations;
- the memorandum must be endorsed on the policy document or in annexure to the policy document;
- the memorandum must be signed by the transferor and transferee;
- the assignment must be registered and dated;
- the memorandum must be signed by the principal executive officer of the life company or a person authorised by the principal executive officer.
Essentially one party needs to sign over the policy to the other in a legal document, signed by both parties and the executive officer of the company which then needs to be filed with the company.
Amidst the messy time of a separation and the tasks that must be undertaken, sorting out a jointly held life insurance policy is a task that we find is often disregarded. Obtaining the right advice from an experienced lawyer is extremely important. A suitably qualified specialist lawyer will not overlook these important details. Life insurance is an important part of a person’s overall estate plan and should be thoughtfully considered.