The benefit belongs to the beneficiary and is not part of the insured’s estate

Many individuals enter into a life insurance contract in which they name a dependent or loved one as the beneficiary in the event of their death. The question that arises is whether this benefit is part of their estate or is independent and belongs to the third beneficiary of the insurance. The answer to the question is related to the inheritance right of the beneficiary and whether this is affected by the amount of the benefit.

The rule of law that applies is that the parties are entitled to agree that the insurance company will grant some benefit to a third party named in the contract in the event of the death of the insured, in return for a good consideration provided to each other, such as the payment of a premium on the one hand and life insurance on the other.

This contract is considered to be life insurance in favour of a third party or a trust for the benefit of the beneficiary and is fully valid and enforceable. It can also take the form of an employee’s participation in a retirement plan where, in addition to the contractual right to a pension, they have the right to allocate part of their expected pension to dependents.

Court case

The administrator of the estate of a deceased person applied to the District Court of Larnaca for directions and an order as to whether the amounts collected from two life insurance policies of the deceased should be paid to the primary beneficiaries, who are mentioned in the insurance policies, and whether, if the amounts were paid to them, their share of the inheritance according to the will of the deceased should be reduced by an equal amount.

The judge who heard the case, currently a judge of the Supreme Court, examined the terms of the insurance agreement and analysed the legal aspect of the matter, referring to English case law, which stated that the contract in favour of a third party is not an unknown concept in law. It is a matter of interpretation in each case whether a contract imposes an obligation on one of the contracting parties to grant a benefit to a third party who is not a contracting party.

Creation of a trust

As further mentioned, it is settled case law that for the creation of a trust in relation to a life insurance contract or the benefit arising from an insurance contract and generally the creation of any trust for the benefit of a third party, it is necessary to establish a clear intention of the insured.

In re Schebsman, the court added that a company had agreed with its employee to make certain payments to his widow in the event of his death occurring within a period of six years from the termination of his employment. The employee died within that period and his estate had become insolvent. The liquidator in the bankruptcy attempted to transfer the payments to be made to Schebsman’s widow to the estate of the deceased and sought a declaration that all sums payable by the company under the agreement formed part of the estate of the deceased.

The liquidator’s claim failed. The company was not only at liberty but obliged to make the specified payments to the widow and there was no question of describing itself as an agent who would receive the money on behalf of and for the account of the estate of the deceased.

In the above case, it was emphasised that the amounts resulting from the agreement between the deceased and the company, were never the property of the deceased and that the latter never had a right to them. His right was to insist that they be paid not to him, but to his wife, as the person he had named in the agreement as the beneficiary.

With regard to the case under consideration, the court ruled that, as is clearly evident from the content of the insurance policies, the intention of the insured was to benefit a third person named in each of them as the beneficiary of the life insurance amounts.

Consequently, the answer to the first question was affirmative, while with regard to the second it was negative, since it ruled that the amounts should not be taken into account in the calculation of their inheritance share, which should not be reduced by an equal amount.