Life insurance policy and beneficiary clause: why it is crucial for inheritance and taxes
The starting point is the legal classification of the act of designating the beneficiary: according to case law, the designation of the beneficiary is an inter vivos act with post-mortem effects, in the sense that the death of the insured person determines the payment of the insurance benefit, but also consolidates the beneficiary’s right, which already arose and was attributed at the time of the designation itself.
This is established by Article 1920, paragraph 3, of the Civil Code, which introduces the right in its own right or iure proprio into our legal system and constitutes one of the cornerstones of life insurance. In fact, it is thanks to this right that the insurance benefit is intangible, with all the benefits that this characteristic entails from the point of view of asset planning: these range from the exemption from seizure and attachment provided for in Article 1923 of the Civil Code to (and above all) the exemption from inheritance tax on the proceeds received by the beneficiaries.
This is because the insurance benefit finds its source in the contract itself and the related payment does not, therefore, constitute a transfer of assets from the policyholder to the beneficiary, but rather from the insurance company to the latter.
When the life insurance policy becomes part of the inheritance: cases in which iure proprio falters
But when something goes wrong with the beneficiary clause, then iure proprio begins to falter, with the risk that inheritance rules will enter the insurance context, undermining all efforts in the area of asset planning. In fact, life insurance does not follow the dynamics of inheritance law except in limited and specific circumstances such as, for example, the collation, imputation, and reduction of donations on the amount of premiums paid, or the revocation of the designation of an “ungrateful” beneficiary or one who attempts to take the life of the insured.
Therefore, to avoid any problems in this regard and to provide greater clarity to interested readers, I have drawn up a guide containing several corollaries and key principles regarding the drafting of beneficiary clauses.
Beneficiary clause in life insurance policies: flexibility yes, but without ambiguity
Corollary no. 1: flexibility but not ambiguity
Flexibility in drafting the beneficiary clause is unquestionable, but at the same time it is essential that it be drafted in a clear and unambiguous manner: it is not a will (unless it is contained therein), but any ambiguity/error of interpretation/uncertainty:
(i) must be resolved by the judge, with consequent delays in the payment of the insurance benefit;
(ii) could cause difficulties in identifying the beneficiary or beneficiaries, which, if unresolvable, would result in the implicit revocation of the designation and the nullity of the beneficiary clause, with the consequent transfer of the insurance benefit to the policyholder’s estate (the same outcome if the policyholder does not designate any beneficiary).
Therefore, transfer of the insurance benefit iure hereditatis.
Beneficiaries of the life insurance policy: why the clause must be notified to the insurer
Corollary no. 2: the beneficiary clause must be notified to the insurer
Do not leave it in a drawer because it could cause delays in the payment of the insurance benefit, particularly in the case of multiple designations over time, some of which have been notified to the insurer and others not.
From a purely legal point of view, the unilateral act of designation is not receptive, in the sense that it does not have to be notified to the insurer to be effective, but from a practical point of view, it is highly recommended to do so: according to long-standing case law, in the event of multiple successive designations, whether or not communicated to the insurer, whether testamentary or not, it is the one closest to the death of the insured that must be taken into consideration by the insurer in order to identify the beneficiaries of the policy (unless they are irrevocable).
The point is precisely this:
- if notification is given, then the insurer is certain of the date and can immediately recognize the valid beneficiary clause (the last one received in chronological order).
- If such notification is not made and, at the time of settlement of the insurance benefit, it emerges that the policyholder had left a beneficiary clause in a drawer with a date later than the last one notified to the insurer, then the insurer must carry out further investigations to be sure that the unnotified beneficiary clause (the one with the later date) is actually valid and can replace the one that was notified to them. The insurer is required to exclude any subjective undue payment, i.e., the payment of the insurance benefit to a beneficiary who is not entitled to it.
Form of the beneficiary clause in the life insurance policy: limits and effects
Corollary no. 3: freedom of form… but not too much
Unless it is included in a will, the beneficiary clause is normally in written form and must be signed by the policyholder (we have already mentioned the non-acceptability of this in corollary no. 2). It does not necessarily have to be handwritten to be valid.
Similarly, the absence of form does not render the clause null and void, but the will of the deceased policyholder must be demonstrated.
Therefore, there will still be delays in the payment of insurance benefits if the written form is not respected. It should be remembered that the written form in insurance contracts is required for evidentiary purposes (so-called ad probationem).
Another aspect closely related to corollary no. 2: the fact that the beneficiary clause is contained in a will does not mean that it takes precedence over another ‘non-testamentary’ clause, whether earlier or later. To give an example, it could happen that the beneficiary clause is contained in a will drawn up prior to the last one notified to the insurer. Considering that the last wishes of the policyholder must be given importance, then it is the beneficiary clause notified to the insurer that must be given priority in this scenario and not the earlier one contained in the will.
Life insurance policy, will, and heirs: when the beneficiary changes
Corollary no. 4: will, testamentary heirs, and policy beneficiaries
Particular attention must be paid here. First of all, a distinction must be made between two legal phenomena: revocation by willand the relationship between the designation of beneficiaries by will and the more generic clause of legitimate or testamentary heirs.
Revocation of the beneficiary of the life insurance policy: express and implied
With regard to revocation by will, case law has integrated a substantive approach with a formal one, in the sense that revocation of the beneficiary is constituted not only by the formal and explicit term ‘I revoke’, but also by all those testamentary provisions that make it unequivocal that the previous designation is no longer intended to be maintained. This approach prioritizes substance over form, but maintains high standards of legal certainty by requiring that the intention be objectively clear and leave no room for ambiguous interpretations.
Examples of explicit and unequivocal revocation are:
(i) a specific written declaration of revocation communicated to the insurer;
(ii) an explicit testamentary provision that expressly revokes the previous designation;
(iii) the specific testamentary attribution of the sums covered by the policy to a specific person other than the original beneficiary;
It is more difficult, however, to identify those implicit testamentary dispositions that are characterized as unequivocal, as they may be characterized by:
- (i) an expression of will that, even if it does not use explicit terms, leaves no doubt as to the real intention;
- (ii) an act that, in its substantive content, is objectively incompatible with the maintenance of the previous designation;
- (iii) the clarity of intent regardless of the literal form used.
Examples of implicit and unequivocal revocation (even if not derived from a will) are the exercise of the right of withdrawal or redemption by the policyholder, or the non-payment of premiums (for policies that provide for this, with a consequent reduction in the insured capital).
Revocation of the beneficiary and case law: the most controversial cases
Emblematic cases are those manifestations which, even if implicit, may create some doubt as to the unequivocal nature of the revocation. Here, the case law of the courts of first instance is not yet clear.
Let us analyze two cases of opposite sign:
● appointment of a testamentary heir to whom ‘the remainder of the movable estate, including cash and bank investments and more’ is attributed: this testamentary provision could in fact constitute an implicit (rectius, tacit) revocation of the previously designated beneficiary but, according to the judge of first instance, it lacks unequivocality and therefore does not constitute a case of revocation of the beneficiary;
● appointment of a testamentary heir to whom “cash and securities of any kind” are assigned: with this wording, the judge considered the revocation to be implicit but also unequivocal, as this expression “cannot fail to include the insured capital.”
Therefore, attention must be paid to the content of wills and beneficiary clauses.
Imprecise beneficiary clause: when law and case law intervene
Corollary no. 5: imprecision refers to the legal regime and jurisprudential principles
If the beneficiary clause or the general conditions of the policy do not regulate in abstract terms the various scenarios that could occur in practice, then this “gap” is filled by the law and the principles of jurisprudence if the policyholder has died. It is necessary to be precise and forward-thinking, without leaving any cases to chance or future memory, but above all, to intervene when the actual drafter of the clause—the policyholder—is still alive.
Let’s look at some examples.
● Unless otherwise specified by the policyholder, the insurance benefit must be divided equally among the beneficiary heirs (and not according to the rules of succession). Any other distribution must be specifically stated in writing.
● Unless revoked or otherwise specified by the policyholder, the predeceasing of the beneficiary results in the transfer of the beneficiary’s share of the insurance benefit to his or her heirs, but with different effects: if the beneficiary had already predeceased the date of designation, then the beneficiary’s heirs will take over iure proprio. Otherwise, then according to the law of succession (i.e., iure hereditatis and not iure proprio).
In the latter case, it follows that:
- a. there is no accrual effect in favor of the other beneficiaries;
- b. the heirs of the predeceased beneficiary take over the insurance benefit, but the distribution is made according to the rules of legitimate succession;
- c. the exemption from seizure and attachment does not necessarily extend to the heirs of the predeceased beneficiary.
● The beneficiary clause “legitimate heirs” is not revoked by the presence of testamentary heirs not designated as beneficiaries of the policy. This should not be confused with the broader beneficiary clause “legitimate or testamentary heirs,” which has the opposite effect, i.e., the replacement of testamentary heirs with legitimate heirs, or the latter in the absence of testamentary heirs.
Designation of the beneficiary in the life insurance policy: when power of attorney is permitted
Corollary no. 6: the beneficiary must be designated by the policyholder, unless power of attorney is granted
There is no doubt that the designation of the beneficiary is a personal act of the policyholder, but whether it is also highly personal depends on the circumstances.
According to recent case law (albeit at first instance), the designation is in fact a highly personal act when included in the will, whereas it would not be in other cases. The effects of such a ruling can be seen precisely in the admissibility or otherwise of designation by power of attorney which, according to the judge, would only be possible when not included in the will: a highly personal act (e.g., will pursuant to Article 778 of the Italian Civil Code or direct donation) totally excludes representation, while Article 1920 of the Italian Civil Code follows the general contractual rules (Articles 1388 et seq. of the Italian Civil Code), allowing power of attorney because it is unilateral but delegable within the mandate.
Life insurance policy and infringement of the legitimate portion: collation, imputation, and reduction
Corollary no. 7: beneficiary clause and so-called “infringement of the legitimate portion”
Article 1923 of the Italian Civil Code safeguards, for the heirs of the contractor, the provisions on collation (between descendants), imputation and reduction (in the event of infringement of the legitimate portion) on the sums that the beneficiary receives from the life insurance, but limited to the amount of the policy premiums. These are legal institutions aimed at avoiding what is commonly known as “lesione della legittima” (infringement of the legitimate portion).
In the context of these legal phenomena, it should be borne in mind that beneficiary clauses may also contain specific provisions regarding exemption from collation or imputation ex se.
In the first case, the deceased policyholder exempts the beneficiary heir from contributing the amount of premiums paid into the policy to the estate, which will therefore be imputed to the legitimate portion and, for the excess, to the available portion.
With the exemption from imputation ex se, the deceased contractor exempts the beneficiary of the policy from subtracting the amount of premiums paid into the policy from the reserved portion, which will therefore be charged to the disposable portion.
For more information on the mechanisms and functioning of collation and imputation ex se, please refer to the two articles written some time ago and published on the we-wealth website. Here, I would like to emphasize that with the relevant exemptions from these two legal institutions, it is possible to modulate the amount received by the beneficiaries, making the benefit received less “detrimental” (depending, of course, on your point of view).
Life insurance and estate planning: why the beneficiary clause is strategic
The designation of the beneficiary, although seemingly simple, has profound civil and tax implications. In fact, from the above, it is clear that the correct drafting, notification, and periodic review of the beneficiary clause are the foundation of consistent and secure insurance estate planning.
This is not a mere formality but a direct strategic imperative:
- (i) to ensure that the policyholder’s wishes are effectively carried out at the time of settlement of the insurance benefit;
- (ii) to avoid administrative delays and legal disputes;
- (iii) but above all to protect the beneficiary’s assets from unwanted interventions by successors resulting from negligent drafting.
