Life insurance for financing and in insolvency

Differences in family provision and succession arrangements at home and abroad

 

The Federal Court of Justice (BGH) ruled in its judgment of 27 September 2012 (Case IX ZR 15/12) that the granting of an irrevocable subscription right – solely for the payment of a life insurance policy in the event of death – is sufficient for this disposition to become insolvency-proof through the passage of time.

 

Give with warm hands

If the beneficiary of a life or annuity insurance policy is merely appointed as a revocable beneficiary, he or she does not even have an expectancy but a completely unsecured prospect of later acquisition, a legal nullity as it were. In contrast, the granting of an irrevocable subscription right offers the beneficiary the security that he alone immediately receives the legal entitlement to any insurance benefit. This includes both the death benefit and the surrender value.

 

Contestation period of four years for creditors and insolvency administrator

Creditors and insolvency administrators of the policyholder can then only challenge this irrevocable disposition as a gift that has already been executed for four years. The policyholder then only has the option of demanding a premium waiver from the life insurance company or terminating the contract. Upon termination, however, only the irrevocable beneficiary receives the surrender value. The amendment of an irrevocable subscription right always requires the consent of the beneficiary. However, creditors and insolvency administrators are regularly unable to enforce this.

 

No attachment of the right to terminate

The right of termination is then unseizable, because this seizure goes nowhere, because a seizure can take place only together with the surrender value. The irrevocable subscription right of the death benefit also includes the claim to the surrender value in the event of termination, so that non-termination does not lead to any change in assets and would therefore not even be contestable. At most, the payment of insurance premiums by the policyholder in the last four years would then still be contestable.

 

Shorter deadlines abroad

If an insurance contract is concluded in Liechtenstein or Switzerland, it may be possible to shorten the contestation period to one year. For an effective choice of law, it is necessary, among other things, that such a contract was in no way mediated through an insurance broker, a financial services provider or a similar “intermediary”. Intermediaries would also be financial planners, the agent of an insurance company, the customer advisor of a bank – regardless of whether they work in Germany or abroad. However, the solicitation of offers by legal counsel would be harmless, because they are not considered as intermediaries or the like – they can also harmlessly take over the complete contract execution in legal representation of their client. Nor can the advice given by an actuary on the differences in the calculation and operation of relevant contracts compared with Germany be objected to. However, not all insurers abroad are equipped to advise German customers – some do not want to compete with their German business.

Up to more than 20% higher returns for male insureds abroad since 21.12.2012 The European Court of Justice (ECJ) ruled in its unisex judgment of 01.03.2011 (Case C-236/09) that taking the gender of insureds into account as a risk factor in insurance contracts constitutes impermissible discrimination. However, the necessary amendment to the law was made belatedly in the SEPA Accompanying Act and came into force retroactively (Federal Law Gazette of 08.04.2013). Since then, so-called bisex tariffs have only been available in non-EU countries, especially in Switzerland, where up to 20% higher pensions may be calculated for male insured persons due to their shorter life expectancy, both in Swiss francs and euros.

Thus, for a pension of mtl. 500 in Switzerland, an amount of up to approx. 25,000 EUR can be saved as a single premium compared to German or EU policies. However, you have to take care of the taxation of the income share in Germany yourself, because only within the EU life and pension insurance policies are automatically reported to the tax authorities – either by the insurer or, in the case of foreign insurers who have not undertaken to do so, by the insurance intermediary, who is otherwise liable for the taxes.

 

Design traps due to reservations in the insurance contract

It is even safer for the beneficiary if the survival benefit is also expressly promised to the beneficiary and the latter accepts this gift immediately – it is advisable to document this in writing. In the case of a split subscription right, i.e. if only the death benefit is covered by the irrevocable subscription right, the survival benefit can certainly be attached. It can have a similarly detrimental effect if the policyholder reserves the right from the outset by means of legal conditions to cancel the subscription right in the event of separation or divorce, for example.

From an economic point of view, this objective can only be pursued within the framework of an inheritance or marriage contract, in particular without it being possible to initially access the assets in the life insurance policy through seizure. However, in the event of an incorrect design, the wife named as the beneficiary may, even in the event of divorce and remarriage, remain the wife to whom the testator was married when the irrevocable subscription right was established. In that case, the ex-spouse receives the insurance benefits because the courts often interpret who should be covered according to the wording of the granting of the right of pre-emption and not according to the meaning and purpose of the presumed will.

 

Possibility of structuring the adjustment of the subscription right

A restriction that the spouse to whom the insured was married at the time of his death should be entitled to draw did not invalidate the grant of the subscription right. It is nevertheless an irrevocable subscription right by which the spouse of the insured acquires the rights under the insurance contract immediately or later at the time of the marriage on the resolutory condition that the marriage is divorced before the insured event occurs. However, this is not a detrimental reservation of the revocation of the subscription right.

The irrevocable beneficiary does not have to be specifically designated to the insurer; it is sufficient that he can be determined. The acquisition of rights by the irrevocable beneficiary can also be made subject to conditions, with the consequence that it is only executed when the condition precedent occurs or ends when the condition subsequent occurs. Depending on the existence of the condition, this can lead to the person of the beneficiary changing or, at times, to a beneficiary not existing at all. This is unobjectionable in view of the principle of freedom of contract, provided that the determination of the beneficiary is left to the expiring time, but is secured by a factual characteristic determined in advance. It is harmless that this characteristic can in turn be influenced by the policyholder, for example through divorce and marriage.

Flexible irrevocable subscription right

In order for the survival benefit to also be unseizable, an irrevocable subscription right would also have to exist for this. However, many people are reluctant to give up these assets irrevocably – except in the event of death. However, by designating the irrevocable beneficiary not in concrete terms but only on the basis of certain features – as conditions precedent or conditions subsequent – such concerns can largely be dismissed.

If, for example, in the event of death or survival, the partner (if any) then living in the joint household or the person then in employment as a private secretary or domestic helper is designated, it can always be achieved without great effort that the irrevocable subscription right falls to another person or that there is no beneficiary. In this way, it can be realised with a maximum of flexibility that the subscription right is withdrawn from the policyholder’s assets as early as possible and – unless otherwise requested at a later date – permanently and thus withdrawn from the access of his creditors. From the point of view of creditors and insolvency administrators, access to a domestic life insurance policy as a contestable gift is only blocked if four years have passed since the disposal in rem.

If the respective spouse is already a beneficiary under the terms of the subscription right provision, this period begins when the marriage takes place. The decisive point is that a purely legal promise, without the involvement of the insurance company, i.e. the obligation in a gift contract, does not start a time limit at all. This is also typical in the company pension scheme if only the employment contract allocates the direct insurance to the employee. In the insolvency of the employer, these assets are then lost for the time being, and there remains the hope of perhaps receiving a small bankruptcy quota later.

 

Arrangement in the event of wastefulness or risk of insolvency on the part of the beneficiary

For tax reasons alone, it may be advisable for a non-profit foundation or recognised charitable organisation with the best credit rating and expectation of survival to take out the insurance as policyholder. If appropriately structured, up to more than 50% of the required premium could even be tax-deductible as a partially remunerated endowment contribution, without this changing anything about the taxation of pensions on the share of income only.

If another person later becomes the heir, it can be ensured that the insurance benefit is only paid out in instalments or as an annuity even after death. Depending on its structure, this income may then only be attachable to a limited extent in Germany or it may be completely unattachable.

even in the event of the death of the beneficiary, his heirs receive the pension. When a foundation is interposed, on the other hand, this can be arranged more flexibly.

Alternatively, it is possible – before the irrevocable subscription right is created or with the consent of the beneficiary – to stipulate vis-à-vis the insurer that the insurance benefit will only be paid out as an annuity on the life of the beneficiary, with pleasure with a survivor’s annuity for the policyholder in the event of the death of the beneficiary. Thus, after the conclusion of a private insolvency after three years in the future, the further pensions are protected from the creditors also of the beneficiary.

 

The race between beneficiaries and heirs

In many cases, disputes arise later between beneficiaries and heirs due to unclear wording in the granting of the right of subscription, for example when it is a question of interpretation as to whether the right of subscription should (still) belong to a former partner or spouse, or whether it should belong to the current (possibly non-marital) partner.

If the subscription right was only granted revocably, it often depends on chance who receives the insurance benefit in the event of death. In particular, it depends on whether the insurer informs the beneficiary of the gift offer in the event of death – or whether the heirs declare a revocation to the insurer and the beneficiary beforehand. Fatefully, it happens time and again that the mail from the insurer to the beneficiary is returned as “unknown, moved” – insurers then hardly ever make their own inquiries into “dormant assets” at home and abroad. Once the claims are time-barred, the assets can be recognized by the insurer as extraordinary income.

One precaution against revocation would be for the allottee to have been demonstrably informed during his or her lifetime of his or her appointment and to accept this gift. This could be documented in the insurer’s file, with a copy for the beneficiary. A corresponding stipulation in the will or a notarial promise to make a gift could also supplement this protection for the merely revocable beneficiary.

 

Claims to a compulsory portion if the estate is eroded

Sometimes the life insurance policy represents the sole asset of the testator, so that those entitled to a compulsory portion may feel ignored. In its rulings of 21 May 2008 (Case No. IV ZR 238/06) and 28 April 2010 (Case No. IV ZR 73/08), the Federal Supreme Court clarified, among other things, that for the calculation of the amount of conceivable claims to compulsory portions and supplements, only the surrender value of the life insurance policy, which may be much lower than the death benefit, one legal second before the death is relevant. Alternatively, a higher actual value could be proven in individual cases via the secondary market for life insurance policies. Proposals by banks and insurance companies from abroad to pass over troublesome beneficiaries of the compulsory portion by using life insurance policies will often not stand up in German courts, because both legal systems almost always have to be taken into account.

 

Design trap with life insurance as loan collateral

If a life insurance policy is released by the bank after the loan has been repaid, the irrevocable subscription right may be revived if it had only been revoked subject to a resolutory condition for the duration of the assignment to the bank – with the consent of the beneficiary. Upon the death of the policyholder, the subscription right shall lapse and be replaced by the newly created claim against the insurer. Because this is not an “acquisition from the policyholder’s assets”, there is no possibility for the insolvency administrator and creditors to contest this.

If only the death benefit is assigned to the bank as collateral for the loan, the survival benefit and the surrender value remain attachable in the event of termination.

 

Property protection or retirement provision

In Germany, there are only limited possibilities to protect one’s income and assets from the access of creditors and insolvency administrators, even when using life insurance. This follows from the fact that claims against the policyholder are protected by the Basic Law like property. The legal situation is sometimes different abroad, so that the assets of a life insurance policy can be invested in an unlimited amount to provide for spouses, life partners and descendants without attachment or execution.

Some foreign legislators have attached greater importance to the protection of family provision, even in the case where there is only a revocable right of pre-emption. Foreign life insurers, however, cannot foresee whether the effective choice of foreign insurance law will be upheld in foreign and domestic courts. Claims made by foreign providers about alleged bankruptcy privileges for German nationals and alleged tax exemption despite residence in Germany will have to be questioned critically by the customer or policyholder. Such things are mostly only put in the spotlight for marketing reasons, unchecked and legally erroneous.

 

by Dr. Johannes Fiala and Dipl-Math. Peter A. Schramm

 

by courtesy of

www.experten.de (Expert Report 01/2014)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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