Reserving the Right to Change the Beneficiary at Will - Claims of Creditors Where the Beneficiary Has Been Thus Named

Life-insurance policies may contain a provision reserving to the insured full power to change the beneficiary or beneficiaries at will while the policy is in force and subject to any previous assignment. When this right is reserved the policy remains the property of the insured, and the original beneficiary obtains no vested rights in the policy or its proceeds but possesses only a "mere expectancy" until after the maturity of the contract.

Various methods may be used in designating the insured's right of revocation. Some companies provide in their policies words to the effect that "when the right of revocation has been reserved, or in case of the death of any beneficiary under either a revocable or irrevocable designation, the insured, if there be no existing assignment of the policy made as herein provided, may, while the policy is in force, designate a new beneficiary, with or without reserving the right of revocation, by filing written notice thereof at the home office of the company accompanied by the policy for suitable endorsement thereon. Such change shall take effect when indorsed on the policy by the company and not before." Other policies state that the insured may at any time change the beneficiary or beneficiaries under the policy, and where this is done it is frequently stipulated that the insured may, however, declare the designation of any beneficiary to be irrevocable. In other instances the change of beneficiary clause may contain stipulations to the effect that if any beneficiary shall die before the insured, the interest of such beneficiary shall vest in the insured, or that the insured reserves the right, without the beneficiary's consent, to surrender the policy for its cash value or to borrow thereon.

In contrast to the foregoing provisions, some companies purposely omit a change of beneficiary clause in their contracts, and ask the insured to state specifically in his application his position in regard to this privilege. These companies, while admitting that the right of revocation may in occasional instances prove of great practical use, call attention to the fact that " a policy containing the unconditional reservation of the right to change the beneficiary produces an instrument identical with the one in which the estate is made the beneficiary." They, therefore, hold that the danger connected with such an unconditional reservation, regarded by them as a questionable privilege, should always be called to the attention of the applicant by the agent. Then, if the applicant still insists on having the privilege, the company will gladly grant the same; but under these circumstances it is felt that the insured asked for the privilege with a full understanding of what he was doing and what his request might mean to himself and family in the future. On the other hand, the advocates of a special beneficiary clause for every contract consider the practice to be supported by reasons of expediency and equity, and contend that the insured should, as a matter of right, have the privilege of doing as he wishes with his own.

Whatever the practice in designating the insured's right of revocation, it is highly important that the legal significance of the privilege to change the beneficiary at will should be clearly comprehended by the policyholder. The possibilities of future bankruptcy do not seriously occupy the thoughts of the average person, yet statistics reveal a surprisingly large number of business failures. Records show that during the past thirty years the number of actual business failures, as compiled by Bradstreet, averages annually 1 percent, of the total number of businesses listed by this organization. As has been well stated: "The probability of business mortality is as great as that of adult human mortality at its average age. In fact, it is identical with the 1 percent. shown by the American tables of mortality on selected lives at age 41." It is also noteworthy that in a year like 1907 about 19 percent, of the total number of failures and over 55 percent, of the failure liabilities were traceable to disasters, failure of. apparently solvent debtors and undue competition, i.e. causes which cannot be regarded as due to faults of those who failed. On the other hand, nearly 65 percent of the total number of failures in that year were due either to incompetency or to lack of capital.

The foregoing considerations assume importance when the change of the beneficiary clause is viewed from the standpoint of claims of creditors. Judging from recent decisions it is probable that a clause reserving full power to the insured to change the beneficiary at will, or without the consent of the beneficiary to borrow thereon or surrender the policy for its cash value, subjects the policy to the claims of creditors and causes it, in case of the insured's bankruptcy, to pass by order of the court to his assignee. Reference is frequently made to the decision of the United States Circuit Court of Appeals on November 9, 1909. This case dealt with a petition to review an order of the District Court which denied the application of the trustee for authority to surrender an ordinary policy of insurance on a bankrupts life and collect the surrender value thereof. The policy provided for the payment of $5,000 to the wife, if she survived her husband, in ten annual installments of $500 each, and in case of her prior death the policy was payable to the husband's estate or to any beneficiary named by him. The policy also provided that the insured could at any time surrender the policy for paid-up insurance or other value. In his opinion Judge Ward, after reviewing the terms of the policy, concluded in part:

The District Judge was of opinion that the wife of the bankrupt was the legal owner of the policy; that it was her property, and, if the insured had the option of terminating her ownership, he had not exercised it. But we think the policy is the property of the husband, that the contract is made with him, and that the wife's interest depends on the contingency of her surviving him. If the property in the policy were absolutely the wife's, the insurance would be payable upon her death to her estate. Certainly the bankrupt has an interest in the policy. If he survives his wife, the insurance will be payable, not to her estate, but to him, or to his estate, or to a beneficiary designated by him. This is a vested future interest. Besides this, though not obliged by the contract to do so, the company is willing, apparently, under the option given the insured to surrender the policy for paid-up insurance or other value, to pay the sum of $1,804.23 upon its surrender. The situation is exactly the same as if the policy contained a stipulation for a cash surrender value. . . . These are clearly interests of the bankrupt which go to the trustee under section 70 a (5) of the bankruptcy act, . . . subject, of course, to the privilege therein reserved to the bankrupt to keep the policy free from the claims of his creditors participating in the distribution of his estate by paying its value, $1,804.23, to the trustees. . . .

It was further contended that, irrespective of the foregoing considerations, the policy is exempt from the operation of the National Bankruptcy Act by virtue of the law of New York which was enacted for the protection of the interest of a married woman and her children in the husband's policy against the claims of Ms creditors. But with reference to this contention the court held that:

It is quite plain that the policies referred to are such as are the absolute property of a married woman or her children, that is, which are payable to her, or her children, or her estate. They may be taken out by the husband, and the premiums up to $500 per annum paid by him. Still the policy must be one which the married woman may dispose of by will, or may, with the written consent of her husband, assign or surrender to the company. This requirement of the husband's assent is not because he is the owner of the policy, but is to protect widows and orphans in respect to such insurance.

If, as seems probable, the courts will generally interpret a transferable beneficiary clause as giving the trustee in bankruptcy the power to distribute the cash value of a policy among creditors, it follows that a policy taken out for family protection, if containing such a clause, will have connected with it a hazard that the insured, in view of the future possibility of bankruptcy, should bear in mind and carefully consider. Numerous statutes, as we have seen, have purposely made it possible for men to make suitable provision for their families in case of premature death by creating an insurance fund that is immune from seizure by creditors. Yet the introduction of a clause giving the insured a free hand to change the beneficiary, or to surrender the policy or use it for borrowing purposes, introduces an element of uncertainty in a contract that in most instances should be made absolutely secure for the benefit of those for whose protection it was expressly taken out and who have the right to expect that the insurance fund, which is their sole provision against want after the decease of the breadwinner, shall not have constantly hanging over it an element of uncertainty. Not to protect a policy against creditors may often result, as has been well said, "in accumulating trouble for a time when misfortune would be amply abundant."

Before leaving this subject, brief reference should be made ; to the beneficiary's interest under a fraternal or mutual benefit certificate. Here the right of revocation is usually reserved to the insured by the constitution or by-laws governing the members, and under such circumstances the interest of the beneficiary is not a vested one. But should the rules or certificate of the order or society, or any statute, contain restrictions as to the classes of beneficiaries that may be named, the holder of the certificate is obliged to observe the same. It has been held that under such conditions the properly named beneficiary can contest an appointment illegally made at a future time. In the absence, however, of any right of revocation by statute or by the rules of the association, or in case of a definite agreement with the beneficiary originally named, the insured is precluded from substituting another appointment.

In industrial policies, it should be stated, it is frequently the practice to include a provision permitting the company to choose the beneficiary under certain circumstances. Usually the clause is given some such wording as the following: " The Company may pay the amount due under this policy to either the beneficiary named below or to the executor or administrator, husband or wife, or any relative by blood or connection by marriage of the insured, or to any other person appearing to said company to be equitably entitled to the same by reason of having incurred expense on behalf of the insured, or for his or her burial; and the production of a receipt signed by either of said persons shall be conclusive evidence that all claims under this policy have been satisfied." Such provisions have been repeatedly upheld by the courts as reasonable in this form of insurance. In Brennen v. Prudential Insurance Company (170 Pa. 488) the court even held that "the company may in its discretion and acting in good faith with the person selected by it, settle for less than the amount of the policy, and the personal representative of the insured cannot recover from the company the difference between the amount so paid and the amount of the policy."