Funding a Trust with Insurance

A Nigerian family will tell you, with complete confidence, that the life policy is in the trust. The premium is paid every year without fail. The trustee has been given the policy number. The letter of wishes names the policy and explains what the money is for. Everybody who needs to know has been told.

Then the death occurs, and the insurer pays somebody else.

It pays the person whose name appears on its own records. It is entitled to do so. Section 69(6) of the Insurance Act 2003 provides that in the case of a claim arising from a life policy, it is sufficient for the insurer to make payment to the beneficiary named in the policy document. The insurer is not obliged to reconstruct the family's intentions. It is not obliged to read the trust deed. It reads its own file.

That is the entire question, and the deed you executed is not the answer to it. The answer sits in a register kept at the insurer's principal office, and the only thing that changes what is written there is a notice the insurer has actually received.

This essay is the third in the funding sequence, and it will look familiar to anyone who has read the first two. The instrument changes. The regulator changes. The discipline does not.

Who does the insurer pay?

Section 17(1)(d) of the Insurance Act 2003 requires every insurer to keep and maintain at its principal office a register of all policies. Into that register goes the name and address of the policy-holder, the date the policy was effected, and — the phrase repays slow reading — a record of any transfer, assignment or nomination of which the insurer has notice.

Three words. Three different entries. Nigerian families use one word for all three, and the word they use is beneficiary.

A nomination is a direction about payment. It tells the insurer who to hand the money to when the event occurs. It creates no proprietary interest in anybody, it can usually be changed by the policy-holder at will and without anyone's consent, and it dies with the policy-holder's ownership. It is an instruction, not a transfer. Most Nigerians who believe they have arranged their life insurance have done this and nothing else.

An assignment moves ownership. A policy of life insurance is a chose in action — a bundle of contractual rights capable of being owned and capable of being transferred. Assignment moves that bundle from the settlor to the trustee. After a valid assignment the trustee is the owner: the trustee may surrender the policy, borrow against its surrender value, vary it within the contract's terms, and sue on it. The settlor cannot.

A transfer, in the register's third sense, covers the movement of the policy by operation of law or by the insurer's own internal process — a change of policy-holder recorded on the insurer's system rather than effected between the parties.

The trust needs the second. Families almost always do the first, and call it the second.

Read the section once more and note what it does not say. The register records transfers, assignments and nominations of which the insurer has notice. Not those which have occurred. Not those which are valid. Those of which it has notice. An assignment perfectly executed between settlor and trustee, witnessed, stamped, filed in the trustee's records and never communicated to the insurer, does not appear in that register at all. As far as the institution holding the money is concerned, it did not happen.

This is the same structure as the two essays before it. In the essay on funding with land the deed of assignment was not the transfer; the entry at the state land registry was. In the essay on funding with shares the share transfer form was not the transfer; the entry in the register of members was. Here the deed of assignment is not the transfer either. The entry in the insurer's register is — and the thing that produces the entry is a notice.

There are two ways an insurance policy comes to be owned by a trustee, and they are not equally difficult.

The first route is assignment. A policy already exists in the settlor's name. It is assigned to the trustee, notice is given, the insurer records the change. This is the route most Nigerian families are on, because the policy was bought years before anyone in the family had heard the word trust.

The second route is original ownership. The trust is settled first. The trustee then applies for the policy as proposer and policy-holder on the life of the settlor, pays the premium from trust funds, and is recorded from the first day as the person entitled. There is no assignment, because there is nothing to assign. There is no notice, because there is no change to notify. There is no priority contest, no question of whether the policy carried a hidden defect before it arrived, and no valuation problem on a policy that has accumulated cash value.

Where a family is still deciding what cover to buy, the second route should be preferred without hesitation. It is cheaper, faster and structurally cleaner, and it removes an entire category of failure from the file. Counsel who is asked about funding a trust with insurance should always ask, before anything else, whether the policy has already been bought.

The second route raises one question that the first does not. Section 56 of the Insurance Act 2003 makes a policy null and void where the person for whose benefit or on whose account it is made has no insurable interest, or where it is made by way of gaming or wagering. Section 56(2) defines the interest broadly: a person has an insurable interest in the life of another where he stands in a legal relationship to that person in consequence of which he may benefit by that person's safety or be prejudiced by that person's death — and section 56(3) expressly extends legal relationship to relationships under customary law and Islamic law where one person assumes responsibility for the maintenance and care of another.

A trustee holding for the settlor's dependants stands in that position through the beneficiaries it serves. The point is not difficult, but it is a point to settle in writing before the policy is issued rather than after the claim is declined. The proposal should disclose the trust, the trustee's capacity, and the beneficial class.

Section 57 assists here and is worth knowing in its own right. A policy may not be made on a life without inserting the name of the person interested in it — but subsection (2) preserves a policy taken for the benefit of unnamed persons falling from time to time within a specified class or description, provided the class is stated with sufficient particularity to make it possible to establish who at any given time falls within it. That is precisely how a discretionary beneficial class is described in a well-drafted Nigerian trust deed. The Act accommodates the structure. The drafting has to earn the accommodation.

What follows assumes the harder route: an existing policy, owned by the settlor, to be moved into the hands of a trustee. Each step carries the verification that proves it was done, because in this sub-cluster the discipline is not that the step occurred but that the file can show it occurred.

Every essay in this sub-cluster ends its analysis with a determination: what, in this asset class, can actually be moved into a trust, and what cannot. For insurance the boundary is unusually sharp, and it runs straight through the two largest death benefits most Nigerian salaried families will ever receive.

Section 4(5) of the Pension Reform Act 2014 requires every employer to maintain a group life insurance policy in favour of each employee for a minimum of three times the employee's annual total emolument. Section 8 provides that where an employee dies, that entitlement is paid by the underwriter to the named beneficiary, in line with section 57 of the Insurance Act 2003. The employee is not the policy-holder. The employer is. There is nothing in the employee's hands to assign, and no assignment the trustee could notify.

The Retirement Savings Account is closed by a different door and just as firmly. Section 8(2) provides that upon receipt of a valid will admitted to probate, or a letter of administration confirming the beneficiaries under the estate of the deceased employee, the Pension Fund Administrator shall — with the approval of the National Pension Commission — release the amount standing in the account to the personal representatives, on the terms of the will or the personal law of the deceased. The balance moves through the estate. It does not move around it.

The determination follows, and counsel should state it to the family in exactly these terms. Employer group life and the retirement savings balance are estate assets in practical effect. They cannot be funded into a trust during the settlor's lifetime, and any plan that assumes otherwise has a hole in it the size of three years' salary.

What can be done is narrower and still worth doing. The trust can be made the residuary beneficiary of a will that pours the estate over into it, so that whatever reaches the personal representatives ends in the trust rather than in a distribution governed by intestacy or by custom. The nomination records held by the employer and the Pension Fund Administrator can be kept current, so that the money at least reaches the right hands before it is directed onward. And the family can be told the plain truth about timing: the pension route runs through the probate registry, and the probate registry will take months that the household's expenses will not wait for. That is the argument for a privately owned policy, assigned properly, sitting in the trust and payable without probate.

The essay on the cost of setting up a trust in Nigeria treats the fee consequences of that route; the essay on the first year of a trust on the first year of a trust treats the sequencing.

Each of these has been seen. None of them involves a bad deed.

The assignment executed and never notified. The commonest failure by a wide margin, and the cleanest: under section 61(1) the assignee has no right to sue for the policy money at all. The trustee holds an instrument, and the insurer holds the money, and the two facts never meet.

The notice given and no acknowledgment obtained. The assignment is probably good. The proof of it depends on the insurer's own record-keeping and the memory of an officer who has since left. The trustee traded a conclusive statutory presumption for the hope that a file was kept.

The nomination left standing. The insurer pays the person its records name, discharges itself under section 69(6), and the trust's remedy is against the recipient rather than the insurer. Recovery from a bereaved relative who has already spent the money is a claim that exists on paper and rarely anywhere else.

The premium abandoned at the handover. Nobody was told the mandate had moved. The policy lapses for want of premium under section 50, and the trust's most valuable asset becomes a surrender value, or nothing.

The defect that travelled with the policy. Section 60 permits the assignee to sue in his own name but provides expressly that the assignee shall not have a better title than the insured. A material non-disclosure at the proposal stage follows the policy into the trustee's hands. Section 55 restricts the insurer's ability to repudiate to breaches that are material and relevant, fraudulent, or fundamental — but the trustee inherits the argument, and the trustee was not in the room when the proposal form was completed. Where a policy of significant value is being assigned, the proposal history is worth reading before the assignment, not after the claim.

The second assignment that arrived first. Priority under section 61(2) runs by date of receipt of notice. A settlor who assigned the policy to a lender two years earlier, and forgot, outranks the trust by two years — unless the trust's notice reached the insurer first, in which case the trust outranks the lender. The register does not care which arrangement the family regarded as real.

A policy does not belong to the person who paid for it. It belongs to the person the insurer's register says it belongs to.

Three asset classes have now been examined, and the same sentence has been true of each of them in a different costume.

With land, the family believed the deed was the transfer, and the state register decided otherwise. With shares, the family believed the transfer form was the transfer, and the register of members decided otherwise. With insurance, the family believes the assignment is the transfer, and a register kept in the insurer's own principal office decides otherwise — populated not by what happened, but by what was notified.

There is one respect in which insurance is kinder than the other two. In land and in shares, the trustee is at the mercy of an institution's willingness to update its own records, and there is no statutory instrument that converts the trustee's diligence into conclusive proof. Section 63 supplies exactly that. A trustee who assigns properly, notifies properly, and asks for the acknowledgment holds a document that the insurer cannot later contradict.

It is the strongest verification artefact in the funding sequence, and it is obtained by writing a letter. Most Nigerian trust files do not contain it.

The deed says what the family decided. The notice says what the insurer knows. Only one of them is asked at the counter.