Excluding Life and Insurance Benefits from Insolvent Estates: A Comparative Study of South Africa, England and Wales, and the United States of America

Abstract

In South Africa, two principles apply to the exclusion of certain assets from an insolvent estate. First is the common-law principle that even the desperate insolvent is entitled to the basic necessities of life. Hence his entitlement to keep certain assets and to protect assets belonging to third parties. Secondly, the "creditor advantage" principle requires the trustee of the insolvent estate to collect assets to benefit the creditors of the estate. One of the assets excluded from the insolvent estate is the life and disability insurance policy benefits of the insolvent. These benefits are excluded, however, only if the beneficiary is the insolvent and the exclusion will not apply where the beneficiary is a third party such as a solvent spouse. However, section 21 of the Insolvency Act 24 of 1936 vests the assets of the solvent spouse in the trustee of the insolvent estate upon the latter's sequestration. This vesting is out of sync with the principle aimed at protecting assets belonging to third parties. In England and Wales a trust is created to protect the insurance policy benefits of a spouse or child of the bankrupt but does not extend to any other third party. In the United States of America the proceeds of a life insurance policy benefit will form part of the estate if the bankrupt owned it before the bankruptcy began or if the debtor acquired or became entitled to it within 180 days after the filing date. Where the debtor nominated a third party as the beneficiary of an unmatured policy, the power of appointment becomes part of the estate of the debtor. As the nominated third party acquires only an inchoate expectation, the third party's expectation of that unmatured life insurance policy benefit forms part of the bankrupt estate. This paper compares the treatment of life and disability insurance benefits in insolvent estates in South Africa with the position in England and Wales and the United States of America to establish whether there are lessons to be learnt which may assist in modelling an insolvency law process for South Africa which will consider the affected members of society.