Articles Posted in Life Insurance

Life Insurance Lawyers can inform their clients that a creditor can have an insurable interest in a life insurance policy.  There is a caveat.  A creditor may designate itself the beneficiary of a policy purchased by it on the life of its debtor, but its insurable interest is limited to the loan balance at the insured’s death; the rest of the policy proceeds belong to the insured’s estate.  This is confirmed in the 1968, Texas Supreme Court opinion styled, McAllen State Bank v. Texas Bank & Trust Co.

The bank asserted rights to the life insurance policy as a beneficiary of the proceeds of the policy in this case.  The insured had pledged policy proceeds as security for the debt.

The assignment or pledge of a policy as security creates a lien on the proceeds on behalf of the assignee.  While some authorities limit the rule, it is generally held that the rights of an assignee under a valid assignment of the policy for security are superior to those of the beneficiary to the extent of the indebtedness secured where the policy provides that insured has the right to change the beneficiary, especially where the beneficiary joins in the assignment; but the beneficiary is entitled to the excess of the proceeds over the amount of the indebtedness secured.

Life insurance lawyers will see fights over who is entitled to life insurance proceeds.  One of the fights is over whether or not the named beneficiary had an insurable interest in the life of the insured.

The main case cited for dealing with this issue is a 1942, Texas Supreme Court opinion styled, Drane v. Jefferson Standard Life Insurance Co.

In the Drane case, Harry E. Ezell, Jr. was named as the beneficiary under two policies insuring the life of Dorothy A. Drane.  Hugh Drane, the executor of Dorothy’s estate filed a lawsuit seeking to prevent Ezell from recovering the money and for the money to go to Dorothy’s estate.

Not just anybody can be a beneficiary to a particular life insurance policy.  The person must have an insurable interest.

A 1894, Texas Supreme Court case styled, Cheeves v. Anders, makes clear that it is well settled that a life insurance beneficiary must have an insurable interest in the insured’s life.

The basis for this rule is twofold: 1) no one should have a financial inducement to take the life of another; and 2) a life insurance policy for the benefit of one without an insurable interest is a wagering contract.  (It should be pointed out there are legal ways to have a life insurance policy on another).

Married persons naming their spouse as a beneficiary in a life insurance policy is common and maybe even the most often seen beneficiary under a life insurance policy.

However, Texas law makes clear that a spouse can designate his or her estate as the beneficiary of the policy, at the expense of the other spouse, absent a showing of actual or constructive fraud.  This was made clear in the 1994, Fort Worth Court of Appeals opinion styled, Street v. Skipper.

In the 1981, Eastland Court of Appeals opinion styled, Pilot Life Insurance Co. v. Koch, the policy at issue contained provisions automatically divesting the spouse of any interest in the proceeds, if the parties are “legally separated” or divorced.  Also, the divorce decree may divest the former spouse of any right to the insurance proceeds.  This was made clear in the 1987, 14th Court of Appeals opinion styled, Novotny v. Wittner.  By statute, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, unless the former spouse is re-designated.  If the pre-divorce designation is invalidated, the proceeds may go to any alternate beneficiary or to the insured’s estate.  If the insurer pays the former spouse based on an invalidated designation, the insurer is liable to pay the proper beneficiary.  This is made clear in the Texas Family Code, Section 9.301.

Are spouses entitled to life insurance benefits?  That is a normal question in a lot of life insurance cases.  Here is some law in that regard.

One spouse can designate his or her estate as the beneficiary of the policy, at the expense of the other spouse, absent any showing of actual or constructive fraud.  This was made clear in the 1994, Fort Worth Court of Appeals opinion, Street v. Skipper.

The 1981, Eastland Court of Appeals opinion styled, Pilot Life Insurance Co. v. Koch, says, policies may contain provisions automatically divesting a spouse of any interest in the proceeds, if the parties are “legally separated” or divorced.  Also, according to the 1987, 14th District Court of Appeals opinion styled, Novotny v. Wittner, the divorce decree may divest the former spouse of any right to the insurance proceeds.  By statute, Texas Family Code, Section 9.301, a divorce invalidates any pre-divorce designation of the former spouse as beneficiary, unless the former spouse is redesignated.  If the pre-divorce designation is invalidated, the proceeds go to any alternate beneficiary or to the insured’s estate.  If the insurer pays the former spouse based on an invalidated designation, the insurer is liable to pay the proper beneficiary.

Who is entitled to life insurance benefits is not always an easy answer.

The designated beneficiary of a life insurance policy generally is entitled to the proceeds upon the death of the insured.  Absent an adverse claim, the insurer may pay the benefits to the designated beneficiary.   This is not a difficult concept but is affirmed in the 1967, Texas Supreme Court opinion, McFarland v. Franklin Life Insurance Co. and in the Texas Insurance Code, Section 1103.102.

As is pointed out in the 1968, Texas Supreme Court opinion, McAllen State Bank v. Texas Bank & Trust Co., the insured’s pledge of the policy proceeds may give a creditor rights superior to the named beneficiary.

Pinning down the exact date coverage begins can sometimes be a tricky proposition.  If an insured dies before a policy becomes effective, there is no coverage.  This was discussed in the 1950, Texas Supreme Court opinion, Republic National Life Insurance Company v. Hall. and the 1980, Eastland Court of Appeals opinion, Durham Life Insurance Company v. Cole, and both are worth reading to understand the issues the courts look to, for their decisions.

A policy may also contain a “good health” clause that requires that the insured be in good health at the time the policy is issued or the coverage will not take effect.  This is discussed in the 1979, Texas Supreme Court opinion styled, Washington v. Reliable Life Insurance Co. and the 1977, Amarillo Court of Appeals opinion styled, United Savings Life Insurance Company v. Coulson.  A good health clause renders the policy void if the insured was  not in good health.  In contrast, a false representation of good health provides a defense only if other elements, such as intent to deceive, are proved.

Keep in mind that just as there are disputes whether coverage took effect before the insured died, there may also be disagreements over whether coverage terminated before the insured’s death.  This is discussed in a 1985, San Antonio Court of Appeals opinion styled, Eagle Life Insurance Company v. G.I.C. Insurance Company and in the 1979, Fort Worth Court of Appeals opinion styled, Leach v. Eureka Life Insurance Co. of America.

Life insurance lawyers will see many reasons for denial of life insurance benefits.  Occasionally, one of the reasons is that the policy had not become effective at the time of death.

Most policies state the “effective date” of coverage.  This date may be earlier than, or later than, the date the first premium is paid or the dates the policy is issued or delivered.  Often, a policy may have an effective date, an issue date, and a policy date, and may all be different, causing confusion or misunderstanding.  If the dates differ, disputes may arise over when the policy actually took effect or terminated.  The effective date can be important in setting the due date for subsequent premiums and thus the date of any lapse or failure to pay a premium.

The 1980, Texas Supreme Court opinion styled, Life Insurance Company of the Southwest v. Overstreet illustrates how confusion can sometimes create problems for the beneficiary.  In Overstreet, a policy provided that its effective date was March 15th and each annual premium was due on the anniversary of that date.  The insured did not pay his first premium until April 18th.  Two years later, the insured died while his premium was due.  If the effective date was measured from March 15th, he dies outside the grace period and had no coverage.  If measured from April 18th, he died within the grace period, and within coverage.  The Texas Supreme Court held there was no coverage, following the majority rule that “a definite statement in the policy of the date on which annual premiums will be due is the due date.  Such a statement of the due date controls even over a provision stating that a policy will not be in force until it is initially delivered and the first premium is paid during the good health of the insured.

Life insurance policies are required to have certain provisions.  To begin with, all life insurance policy forms have to be approved by the Texas Department of Insurance.

Texas Insurance Code, Section 1101.004 requires that all policies allow a grace period of at least a month.

Section 1101.003 requires that the submitted application be part of the life insurance contract.