Ch 14 Assignment of Life Insurance Contracts

Collateral assignment

Transfer of some of a property owner's interests to provide security for a loan

policy is pledged as security for a debt

pledgee can neither surrender the policy nor collect the full amount of the proceeds at maturity if they exceed the amount of the pledgee's interest unless there is a specific agreement that confers such rights on the pledgee

5 parties other than the insurance company may be associated with a life insurance policy

Applicant, insured, owner, beneficiary, and assignee.

spendthrift clause

Denies the beneficiary the right to commute, alienate, or assign his or her interest in the Prroceeds. Furthermore, in a few states the laws that protect insurance proceeds from the claims of the beneficiary's creditors prohibit an assignment of the beneficiary's interest

resulting trustee

If the assignee requests the payment of a greater sum than the amount of the assignee's interest, he or she becomes what in law is known as a resulting trustee for the excess and must account under the principles of trusteeship to the owner or beneficiary, as the case may be, for such sum.

collateral assignments

interest of a third-party beneficiary has usually been viewed by the courts as being subordinate to that of the assignee

Defeasible vested interest

The beneficiary has a vested interest in the policy, but that the beneficiary's interest may be extinguished or terminated by the policyowner

collateral assignment was made using the ABA assignment form

assignee would not need the policyowner's consent to surrender the policy or to collect death proceeds in excess of his or her interest

English rule

Adopted in minority of American jurisdictions The assignee who first gives notice to the insurance company has prior claim to the proceeds, provided that such assignee, at the time the policy was assigned to him or her, had no notice of a prior assignment.116 If the assignee did know of an earlier unrecorded assignment still in effect, he or she would, of course, have been guilty of fraud in accepting a second assignment of the same interest.

Multiple assignments

Assignee with preferred claim will lose his or her priority in any jurisdiction if assignee fails to notify the insurer of claim before the company has paid another assignee of record.

Multiple Assignees

English rule American rule

Bill of Interpleader

Equitable device, pays the proceeds into court. In taking such action, it admits its obligation to pay and petitions the court to adjudicate the conflicting claims and determine who is entitled to receive the money

collateral assignment

FALSE once the loan is repaid by the assignor, the assignment is released and all ownership rights revert to their status before the assignment

Insurable Interest

If the applicant for insurance has an insurable interest in the life of the insured at the inception of the contract, an insurable interest on the part of the assignee is not required, either at the inception of the contract or at the time of the insured's death. if the insured were induced by the assignee to take out the policy, the assignee would have to have an insurable interest since in effect the assignee would be the applicant. A creditor-assignee must have an insurable interest in the life of the insured at the maturity of the contract. While it is clear that a creditor has an insurable interest in the life of his or her debtor, the amount is not limited to the amount of the debt, and there is no clear rule as to how much more than the debt is acceptable public policy.in most jurisdictions a policy can be sold to a person who has no insurable interest in the life of the insured.

Revocable or Irrevocable Beneficiary Designation

If the beneficiary designation is revocable, the majority rule is that the policyowner can assign the policy without the consent of the beneficiary and without complying with the formalities for changing the beneficiary designation.

Assignment by the Beneficiary

In the absence of a provision to the contrary, the beneficiary can assign his or her interest, both before and after maturity of the policy.

Company Not Responsible for Validity of Assignment

Policy provision pertaining to assignment almost invariably contains a statement that the company is not responsible for validity of any assignment

American rule

Prevailing rule— Aassignee who is first in point of time will be preferred, regardless of notice to the company. This rule is subject to the important exception that if the prior assignee fails to require delivery of the policy and thus permits a subsequent assignee to obtain delivery of the policy with no notation of the prior assignment, the subsequent assignee's claim will be superior to that of the original assignee.

Gift

Transfer without reciprocal consideration

Partial assignment

Transfers less than all the assignor's rights

Multiple Assignees

Zachary, who is getting a bit forgetful in his old age, makes an absolute assignment as a gift of a $50,000 policy on Zachary's life to Annie, who is his favorite daughter. Some time later he gives away the same policy by an absolute assignment to his church, which promptly notifies the insurer. When Zachary dies, who gets the proceeds, Annie or the church? • English rule: the church, if it had no knowledge of the earlier assignment because Annie apparently didn't notify the insurer • American rule: Annie, the first assignee in point of time, unless she failed to require delivery of the policy to her

EFFECT OF AN ASSIGNMENT ON A BENEFICIARY'S RIGHTS

depends not only on the type of beneficiary designation but also on the type of assignment involved: an absolute assignment or a collateral assignment. The absolute assignment divests the policyowner of all incidents of ownership and transfers all rights and interests in the policy absolutely and permanently to the assignee. The collateral assignment, on the other hand, transfers to the assignee those rights—and only those rights—needed to protect a loan from the assignee to the assignor.absolute assignments have frequently been used when only a security arrangement was intended. In such cases the assignment is treated as a collateral one and is released upon satisfaction of the assignor's obligation to the assignee. If the policyowner attempts to assign the policy without the consent of the beneficiary when such consent is necessary, a valid transfer of the policyowner's interest takes place, but the beneficiary's interest is not affected.If the assignment affects a revocable beneficiary in a jurisdiction that sees a defeasible vested interest, the designation remains in effect until a change has been accomplished in the prescribed manner. If the assignment involves an irrevocable beneficiary, the designation is unaffected and the assignee can exercise no contract rights and privileges without the irrevocable beneficiary's consent.n cases involving absolute assignments that are not incidental to a credit transaction, some courts have concluded that a formal assignment with notice to the insurance company substantially conforms to the requirements for a change of beneficiary and operates as such.absolute assignment of policy ownership does not operate to change the preexisting beneficiary designation. Consent of the beneficiary to the assignment is therefore regarded in all jurisdictions as conclusive evidence of intent to give a preferred status to the rights and claims of the assignee (the new owner)

incidents of ownership

if the insured had any incidents of ownership in the policy during the 3 years prior to death, the policy's death proceeds are included in the insured's estate for federal income tax purposes. When someone other than the insured is the owner of the policy, it is customary for the policy to restrict the right of assignment to the owner. Assignor of the contract cannot, by the unilateral action of assigning the contract, impair or defeat the vested interest of another party to the contract.In the typical case only one other party can be adversely affected by the assignment, and that is the beneficiary.

In all states it is held that whenever the beneficiary of a policy is the insured or the insured's estate, the claims

of the assignee will prevail over those ofthe executor or administrator of the insured's estate.114 This is true whether the assignment is absolute or collateral in form. it is the current practice to use collateral assignment forms that require the beneficiary's signature.

ownership endorsement

ownership in the full legal sense can be transferred only by means of a written instrument, acceptable to the company, endorsed on the policy

Ownership Rights after Death of Insured

• beneficiary to receive proceeds • beneficiary to elect settlement options (unless made irrevocably by owner before death) • beneficiary to designate direct and contingent beneficiaries (if applicable) • collateral assignee to receive proceeds

Revocable Beneficiary Subordinate To

• change of beneficiary • collateral assignment • absolute assignment

Two sets of rights in a life insurance policy:

those that exist during the insured's lifetime and those that arise after the insured's death. The first set is known, quite logically, as prematurity rights, and the second set as maturity rights

Absolute assignment

Transfer to the assignee by sale or gift of all the assignor's rights.

Notice to the Company of Assignment

If, without notice of an assignment, a life insurance company, upon maturity of a policy, pays the proceeds to the beneficiary of record, it will be absolved under the general rules of law from any further liability or obligation under the policy, even though a valid assignment of the policy was in effect at the date of the insured's death

American Bankers Association (ABA) assignment form

Ken, the policyowner and insured, named "my children" as revocable beneficiaries. He collaterally assigned the policy to Local Bank as security for a loan. Ken died before the loan was repaid. Local Bank has two options under the ABA form: • Collect the full death proceeds, take what is owed to it, become a "resulting trustee" for the excess, and determine who is to receive the proceeds as a member of the class designation "my children." • Collect only the amount of its interest in the proceeds from the insurer and let the insurer sort out who gets the remainder, perhaps with the help of the courts if there is a dispute as to who makes up the group "my children."

1911 Mr. Justice Holmes explained the rationale of this doctrine

Life insurance has become in our days one of the best recognizedbforms of investment and self-compelled saving. So far as reasonablebbsafety permits, it is desirable to give to life policies the ordinary characteristics of property. . . . To deny the right to sell . . . is to diminish appreciably the value of the contract in the owner's hands.minimum price at which a policy should sell is the cash value, but the real value of a policy on the life of a person in poor health is somewhere between the cash value and the face amount of the policy of the assignee will prevail over those of the executor or administrator of the insured's estate. This is true whether the assignment is absolute or collateral in form.those that exist during the insured's lifetime and those that arise after the insured's death. The first set is known, quite logically, as prematurity rights, and the second set as maturity rights

Effect of Assignment on a Beneficiary

Manuel was the owner and insured under a $100,000 life insurance policy in which Maurice is designated as the revocable beneficiary. Manuel executed a collateral assignment of the policy, without Maurice's knowledge or consent, to John to secure a $55,000 loan. When Manuel died, $43,800 of principal was still owned to John, plus $3,700 of interest. Therefore, the death proceeds will be divided, with $47,500 belonging to John and $52,500 belonging to Maurice. It is the rule in all states, however, that when the beneficiary designation is irrevocable, the policy cannot be assigned without the beneficiary's consent.

Ownership Rights before Death of Insured

• surrender policy for cash value • request policy loans • elect nonforfeiture option • assign the policy • designate primary and contingent beneficiaries • elect dividend options (if participating) • elect settlement options • exchange the policy for another • reinstate the policy after lapse • utilize automatic premium loan All prematurity rights are vested in the owner, including the right to control the disposition of the maturity rights. Furthermore, during the lifetime of the insured, the owner can exercise all the rights and privileges in the policy without the beneficiary's consent

the following rights will not pass to the assignee, unless the policy has been surrendered

• the right to collect from the insurance company any disability benefit payable in cash that does not reduce the amount of insurance (The so-called maturity type of permanent and total disability income provision found in some of the older policies provides for the deduction of each monthly payment from the face amount of the policy.) • the right to designate and change the beneficiary, subject to the assignment • the right to elect settlement options, likewise subject to the assignmentIn consideration of the rights vested in him or her the assignee agrees• to pay over "to the person entitled thereto under the terms of the Policy had this assignment not been executed" any sums remaining after the liabilities, matured or unmatured, to the assignee are satisfied • not to surrender the policy or borrow upon it except for the purpose of premium payment, unless there has been a default in the obligations to the assignee or a failure to pay premiums when due, and in any event, not until 20 days after the assignee mails to the assignor notice of his or her intention to exercise such right • upon request, and without unreasonable delay, to forward the policy to the insurance company for endorsement of any designation or change of beneficiary or any election of a settlement option

ABA Assignment Form

• the right to collect from the insurance company the net proceeds of the policy when it matures by death or as an endowment • the right to surrender the policy for its cash value • the right to assign or pledge the policy as security for loans or advances from the insurance company or other persons • the right to collect and receive all distributions of surplus to which the policy may become entitled during the time the assignment is in force, as well as all dividend deposits and paid-up additions credited to the policy as of the date of the assignment, provided appropriate notice is given to the insurance company by the assignee • the right to exercise all surrender options and to receive the benefits and advantages therefrom