Articles Tagged with beneficiaries

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The law which requires a policy owner to have an insurable interest in whatever is being insured seems fairly straightforward.  Under Tenn. Code Ann. § 56–7–101, a person who buys an insurance policy must have an insurable interest in what is being insured.  For example, you can only take out a homeowner’s policy on your own home, and not on the home of a stranger.

In the context of life insurance, the insurable interest rule requires that the beneficiary of the policy suffer some type of loss if the insured were to die while the policy was in effect.

For example, a minor child would have an insurable interest in his or her parents.  An investment firm would have an insurable interest in an entrepreneur to whom it had just given a sizable loan to start a company. In contrast, if a stranger convinced a wealthy senior citizen to let him or her take out a policy insuring the senior citizen’s life, that policy would be void.

As it relates to life insurance, the insurable interest requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

In practice, the insurable interest requirement is not as simple as it seems.  For example, what if there is an insurable interest at the time the policy is issued, but not at the time the person whose life is insured dies? That question was answered by the Court of Appeals of Tennessee in Trent v. Parker (1979).  In that case, a corporation took out a life insurance policy on its CEO.  The CEO later left the company, and then filed suit against the company asking the court to cancel the policy.  Ruling in favor of the CEO, the lower court voided the policy stating that the company no longer had an insurable interest in its former employee.

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Under what circumstances will a court rule that the named beneficiary under a life insurance policy is not entitled to receive the proceeds of the policy?  In Estate of Lane v. Courteaux (2017), the Court of Appeals of Tennessee wrestled with that issue, before ruling against the party who argued that a named beneficiary should not be entitled to any proceeds under the policy.  According to the court, a named beneficiary of a life insurance policy will almost always be able to recover the death benefit, even when there are compelling reasons to award the proceeds to another party.

The facts of Estate of Lane are tragic.  A wife had a $600,000 life insurance policy in which she named her husband the sole beneficiary. Later, she was diagnosed with terminal cancer.  Shortly after, her husband learned he also had terminal cancer.

Although the husband was not expected to outlive his wife, she passed away before he did.  Shortly before her death, the wife, while retaining her husband as a co-beneficiary, added her sister, Amanda Courteaux, as a co-beneficiary.  This caught the husband by surprise.  When he discovered, after her death, that his wife did add her sister as a beneficiary of the life insurance policy proceeds, he speculated that his wife wanted her sister to provide for their son, who was on the verge of losing both his parents.  Under the life insurance policy at issue, the wife’s sister was entitled to $300,000 of the policy proceeds.

Later, the husband believed Courteaux was going to use the proceeds for purposes other than his son’s welfare.  He then filed a complaint against Courteaux seeking to have nearly all of her share of the proceeds placed into a trust for the benefit of his son.  In his lawsuit, the husband sought relief, in part, under the legal principle of promissory estoppel.

Prior to the trial, the husband passed away, and his executor and estate were substituted in his place.  Before he died, the husband gave a deposition in which he testified about a document created by his wife that he discovered after her death.  According to the husband’s testimony, the document indicated his wife wanted Courteaux to have only $30,000 of the proceeds for herself, with the remainder of her share to be transferred to her husband to use for their son’s benefit. (It is not clear from the court opinion what exactly this document was, or what it said.)  At trial, the deceased wife’s half-sister also testified wife wanted Courteaux to receive only a $30,000 share of the proceeds.

At trial, Courteaux conceded that she and her sister both promised to take care of each other’s children if anything ever happened to one of them.  Nevertheless, she testified that the life insurance proceeds were “my money.”

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As a general rule in Tennessee life insurance policy cases, a beneficiary named in a life insurance policy does not have a vested interest in the policy’s proceeds when the person whose life is insured dies. If the owner of the policy retained the right to change the beneficiary, which is almost always the case, he or she can do so.  Absent fraud, undue influence or lack of mental capacity, an owner can change the beneficiary of the life insurance policy any time before his or her death.

There is one notable exception to the above general rule which comes up sometimes in Tennessee life insurance policy cases. When someone is ordered to name a spouse, or his or her children, as beneficiaries of a life insurance policy as part of a divorce decree, then, any change that person makes before his or her death which contravenes the divorce decree may well be ineffective.

In Holt v. Holt (Tenn. 1999), the divorce decree required the Ex-Husband to acquire a $100,000 life insurance policy and to name his son (“Son”) as beneficiary.  The Ex-Husband, however, did not comply with the terms of the divorce decree.  Instead, he purchased two policies: a $50,000 policy, for which he designated his mother (“Mother”) as beneficiary; and, a $40,000, policy for which he designated Son as beneficiary.  So, Ex-Husband under insured Son by $60,000.

The Ex-Husband passed away, and the Ex-Wife, looking out for Son, sought enforcement of the divorce decree. When Ex-Wife and Son sued, they named Mother as a defendant to the lawsuit on the grounds that the $50,000 of life insurance proceeds for which she was the designated beneficiary should be paid to Son.

Mother died after Ex-Wife and Son brought suit. The administrator of her estate was substituted in her place and argued that the Ex-Wife and Son were not entitled to the proceeds of the $50,000 policy. She argued that their only remedy was to obtain it from the assets of Ex-Husband’s estate, which did not include the life insurance policy benefits of the policy payable to Mother.

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