The beneficiary rights in a life insurance contract

The beneficiary is the person entitled to the agreed compensation, i.e. he receives the benefit from the insurer when the event, for which the risk is covered, occurs: the death or survival of the insured. His position in law results from his nomination by the policyholder and, following the occurrence of the insured event, he acquires his own substantive right. This right protects him from the actions of the policyholder’s heirs and creditors, who can only claim the amount of premiums paid in fraud of their rights. The beneficiary's right has an inter vivos contractual origin.

The role of a life insurance beneficiary 

The beneficiary is involved on two different instances: 

1) During the life of the policyholder (the insured or grantor), when the latter formally sets up the insurance policy and/or forms the intention to grant a policy aimed at ordering his succession and inheritance mortis causa; and 

2) When the policyholder dies, at which time the rights of the beneficiary(ies) of the life insurance policy and the inheritance rights of the heirs must be determined, in accordance with the provisions of the insurance policy, of his will and/or of the law, and above all the possible application of the rights of legitimacy recognised by Spanish civil law.

Thus, when taking out life insurance in favour of a third party (i.e. the beneficiary of this life policy) - it will be necessary to determine in what way the resulting advantages influence the inheritance rights of the policyholder and of the heirs of the insured. In any event, as mentioned above, Article 84 of the LIP establishes the immediate and direct right of the beneficiary of the life insurance policy to receive the benefit: "The insurer's benefit must be paid to the beneficiary, in accordance with the policy, even against the claims of the policyholder’s legitimate heirs and creditors of all kinds (...)", since the last paragraph of Article 85 specifies that "the beneficiaries who have the status of heirs retain this status even if they renounce the inheritance" (i.e. it is the possible for him to accept the insurance and renounce the inheritance, since the insurance policy is not part of policyholder’s estate).

The importance of the beneficiary nomination

The nomination of beneficiaries is of crucial importance and is the responsibility of the policyholder (ex. Article 84 of the LIP), who may modify a nomination made, without the consent of the insurer at any time (except in certain cases, referred to below).

As regards the form of the nomination, this same Article establishes that the nomination may be made in the insurance policy itself, either when it is entered into or later, by means of a written declaration communicated to the insurer by whatever means. The nomination may also be made in the will, which accepts the validity of wills which only contain a provision nominating the beneficiary of the testator's life insurance policy.

The irrevocable nomination of the beneficiaries and its consequences

The policyholder may expressly waive his right to revoke the nomination of the life insurance beneficiary at any time, as recognised by Article 87 of the LIP. This is what is commonly called in practice an “irrevocable nomination of beneficiaries”. 

In such cases, the legally prescribed consequence is - among other things - the loss of the right to change beneficiaries, to make surrenders, or to assign or pledge the policy. Similarly (and unlike in other countries), the LIP does not require that the beneficiary accepts his nomination in order to confirm its irrevocable nature, since in practice and in many cases (at the wish of the policyholder), the beneficiaries do not know, or should not know, about the existence of the insurance of which they are the beneficiaries.

Consequently, an irrevocable beneficiary of an insurance policy is the holder of an economic interest such as the right to receive the benefit, even though this is conditional on the occurrence of the contingency. 

However, unlike other countries where other possibilities are provided for, such as the "accepting beneficiary" [1]  or the irrevocable beneficiary[2] , where the policyholder, despite this designation, continues to act on the policy provided he is authorised by the designated beneficiary(ies) (for example: make surrenders, pledge policies, or carry out other transactions, etc.), Spanish law does not provide for this. Indeed, the LIP clearly makes it impossible for the policyholder, once he has renounced his power of cancellation, to make surrenders under the policy or to pledge it, even if he has the consent of the beneficiaries. If the legislators had wanted to consider this possibility, they would have established this in the law itself, as is the case in other countries.

Apart from the tax advantages which such a nomination has offered until now in connection with wealth tax but which disappeared following the entry into force of the law against tax fraud in Spain, the objective sought in most of cases with this type of irrevocable nomination is to guarantee and ensure that the family estate’s benefit will ultimately reach the person or persons chosen by the policyholder. 

It is therefore possible to conclude that life insurance is a useful and effective wealth planning instrument, which may be adapted to personal and inherited wealth situations.
 

[1] When the designated beneficiary accepts the benefit of the life insurance policy and thus becomes an “accepting beneficiary”.
[2] When the policyholder nominates one or more beneficiary(ies), waiving his right of cancellation (irrevocable nomination of the beneficiary).