A comprehensive life insurance policy issued by a reputable insurer will ensure that your family does not suffer financially should you pass away suddenly. Choose the right policy and your family can also look forward to financial assistance in the event you contract a critical illness or sustain a serious injury. However, before you get out your card and purchase a suitable policy, it’s crucial to consider all the potential legal issues, both for you as a policyholder and for your beneficiaries.
If you’ve no idea what type of legal issues you or your beneficiaries might face in the future, that’s not a problem. Below, you will find all the information you need in our concise guide to life insurance and the law.
Life Insurance and the Law: Getting to Grips With the Basics
To understand the legal implications of a life insurance policy, you first need to understand that a policy document is not just a list of what you get for your money: it’s a binding legal contract. This means you need to scrutinise the terms and conditions very carefully before committing yourself to a particular policy or insurer.
You need to consider your legal obligations as set out in the life insurance policy document. You also need to anticipate (to the best of your ability) any potential legal complications that may arise as a result of your life insurance arrangements.
Your Legal Obligations When Purchasing a Life Insurance Policy
On the 1st January 2021, amendments to existing regulations regarding people’s Duty of Disclosure when purchasing a life insurance policy came into effect. The most important change to note, from our perspective as potential policyholders, is the ‘insured’s duty to take reasonable care not to make a misrepresentation’ (when applying for a new policy). But what does this mean in plain language?
Your duty of care when organising life insurance means that, in addition to never knowingly making any false statements about yourself or your circumstances, you must take reasonable care never to avoid doing so unwittingly, too. So what might a careless misrepresentation look like?
Imagine you are asked how many times you have visited your doctor over the last 5 years, and when answering the question, you accidentally miss one or two appointments for what you considered at the time as minor, inconsequential ailments. It might seem like an entirely understandable oversight from your perspective, but your insurer is very unlikely to agree. And because you could have easily ensured that no appointments were missed (by requesting a copy of your medical records), this would almost certainly qualify as careless misrepresentation of the facts.
Whilst most insurers are unlikely to pursue legal action after discovering an honest, but careless, misrepresentation of the facts, they are likely to reduce the level of benefits proportionately or, in some cases, void the policy and return any premiums already paid. To ensure that your life insurance policy does what you want it to do, it’s vital to take reasonable care when submitting information about yourself, your health and your circumstances to insurance companies.
Potential Legal Issues Relating to Policy Beneficiaries
As a life insurance policyholder, it’s important to review your coverage at least annually to ensure that it still meets your needs. In particular, you should make sure that any changes relating to the beneficiaries of your policy are swiftly implemented.
Failure to update beneficiary details can result in the wrong person receiving a benefit while the desired beneficiary is left out in the cold. It could also lead to delays in benefit payments to other beneficiaries. Other beneficiary-related legal issues that may arise in the future include:
● Beneficiary Nomination Disputes and Disagreements – It’s well worth sitting down with your family before choosing a new life insurance policy, especially those family members you intend to nominate as beneficiaries. Whilst it’s normally very difficult to successfully challenge life insurance beneficiary nominations without clear evidence of fraud or coercion, even an unsuccessful challenge could seriously delay benefit payouts. For this reason, we recommend holding a family meeting at which everyone is free to voice their concerns, should they have any, regarding your intentions. Ironing out inter-family disagreements at this stage can help avoid lengthy, not to mention costly, legal battles in the future.
● Documentation Delays – Some legal difficulties may be related to delays in obtaining the necessary documentation to submit to your insurer, rather than the terms and conditions governing your policy. Many people encounter significant delays in obtaining a death certificate, particularly if the policyholder passed away in suspicious or legally ambiguous circumstances. If your beneficiaries are unable to locate the policy document after your passing, this could also complicate matters and lead to payout delays.
● Conflicts With Wills – If your will contradicts your life insurance beneficiary nominations, this could lead to legal disputes that delay the payment of benefits. However, it’s important to note that in most jurisdictions and in most cases, a life insurance nomination will override the terms of a will, regardless of whether the nomination preceded or followed the writing and registering of the will.
● Estate Administration/Probate Delays – In cases where life insurance benefits are paid into the deceased’s estate prior to disbursal, delays due to probate or estate administration matters are commonplace. The simplest way to avoid such delays is to nominate specific beneficiaries so payments can be made directly by the insurer. Only when there are no named beneficiaries, or those that are named have predeceased the policyholder, are estate administration and probate delays likely to be a factor.
As you can see, most, but not all, of the potential legal issues for beneficiaries can be avoided with careful planning.
Make Sure You’ve Covered Everything
Our domain of experience is the life insurance industry, not the law. Because of this, we urge interested readers to consult a qualified and experienced legal professional if they are unsure of their position. Whoever you consult, if you tackle life insurance legal issues now, it could help you avoid potentially catastrophic consequences later.
