An irrevocable trust nomination, a bank assignment and a missed premium
Mr Ng, aged 60, took out a whole life policy 15 years ago with a death benefit of HK$2,000,000. The policy has a cash value of HK$600,000. When he took out the policy he nominated his first wife, May, as beneficiary. The nomination form was marked 'irrevocable' and was expressed to be made under the policy's trust nomination provision. Mr Ng divorced May five years ago and remarried last year. He now wants to (a) change the beneficiary to his new wife, and (b) assign the policy to a bank as security for a HK$500,000 loan for his business. He also has an outstanding policy loan of HK$150,000 and missed the premium due ten days ago. The grace period is 30 days.
1. Can Mr Ng change the beneficiary? Explain the effect of the irrevocable trust nomination.
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An irrevocable nomination creates a vested interest in the nominated beneficiary. Mr Ng cannot unilaterally revoke or change it; the insurer will require the written consent of May before recording a new nomination. Divorce does not automatically revoke a nomination, and remarriage does not override it. The fact that the nomination was made under the trust nomination provision strengthens the position: the proceeds are held on trust for May and do not form part of Mr Ng's estate, so they are not available to the new wife or to creditors as part of the estate.
The practical steps are to check the exact wording of the nomination and the policy's trust provisions, then ask May to consent in writing to the change. If she refuses, Mr Ng cannot redirect the death benefit. He could consider a separate new policy for his new wife, subject to underwriting and affordability. He should not be advised to cancel the existing policy simply to defeat the nomination, because that would destroy the cover and may be unsuitable. The insurer will act only on a properly documented nomination or consent.
2. Explain the issues with the proposed assignment and the outstanding policy loan.
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The policy can be assigned, but the assignment must be in writing and notified to the insurer, which will normally require acknowledgement and registration. A collateral assignment to a bank transfers rights only to the extent of the secured debt; the bank can claim up to the outstanding loan and the balance goes to the beneficiary or estate. An absolute assignment would transfer the whole policy, which is not what is intended here.
The existing policy loan of HK$150,000 plus interest is a prior claim on the policy. The bank will require disclosure of the loan and will usually insist that the loan be repaid from the assignment proceeds or that its security rank ahead of the policy loan. If the bank lends HK$500,000 against a policy with a HK$2,000,000 death benefit, there is adequate cover, but the cash value may be eroded by the loan and interest. If Mr Ng assigns without telling the insurer, the assignment may not bind the insurer. The irrevocable nomination also complicates matters: the bank's security may be subject to May's trust interest, so the bank's lawyers will need to review the nomination. Mr Ng should obtain independent legal and insurance advice before signing.
3. What happens if he does not pay the premium by the end of the grace period, and can the policy be reinstated?
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The grace period is 30 days, so cover continues during those 30 days even though the premium is unpaid. If the premium is still unpaid at the end of the grace period, the policy will lapse, unless the policy provides for an automatic premium loan or another non-forfeiture option. If Mr Ng dies during the grace period, the insurer will normally pay the claim after deducting the unpaid premium.
After lapse, reinstatement is usually possible within a period stated in the policy, commonly up to two years, on evidence of insurability and payment of the overdue premiums plus interest. Because Mr Ng is now 60 and may have new health issues, the insurer may decline reinstatement or impose terms. If reinstatement is not available or not affordable, the alternatives are the non-forfeiture options, such as reduced paid-up insurance or extended term insurance, or surrender for the cash value. The policy loan and interest will reduce any of these amounts. He should act before the grace period ends rather than wait for the policy to lapse.