Life insurance and forced heirship

Thu 21 March 2019, Philippe Ropenga forced heirship

Life insurance refers in this post to a contract that provides money to a beneficiary at the time of the subscriber's death. The subscriber usually invests money by paying premiums. Life insurance has a peculiar status regarding forced heirship. Let us explore the legal landscape (1) to discover practical pathways to avoid pitfalls that may be hard to notice (2).

1 Legal landscape

French law of succession is governed by two main principles (1.1). Life insurance policies follow them and have a peculiar status (1.2).

1.1 Two main principles

According to the principle of universal succession, each heir has a right to the estate as a whole after the death of the person who owned it. The testament states how the deceased wished the estate to be divided between heirs. After liquidation, each heir has rights related to pieces of property that were part of the estate. Forced-heirship rules determine who the forced heirs are. Forced heirship prevents a forced heir from being deprived of his share by the testator. This principle plays a major role in French domestic law but not in French international law¹.

Life insurance has a peculiar status that affects the application of these two principles.

1.2 A peculiar status

Legifrance translation of Article L132-8 §1 of the French insurance code² reads as follows: "The capital or annuity insured may be payable upon the death of the insured to one or more specific beneficiaries." §4 of the said Article provides that "The heirs, thus designated, shall be entitled to benefit from the insurance in proportion to their due portion of inheritance. They shall retain such right in the event of waiver of inheritance."

§4 may seem strange since it has been said that the principle of universal succession meant that heirs had a right to the estate as a whole. This provision is necessary since Article L132-12 of the insurance code provides that "The capital or annuity stipulated to be payable upon the insured’s death to a specific beneficiary or to his heirs shall not be part of the insured’s estate. The beneficiary, regardless of the form and date of his designation, shall be deemed to have been entitled thereto as from the date of the contract, even if his acceptance thereof is subsequent to the insured’s death." Since the capital or annuity is not part of the succession³, universality of succession does not apply to it and when one calculates how to distribute the capital, one does not take the rest of the estate into account. In practice, the practitioner often strictly follows the subscriber's wishes and distributes the sums accordingly. Nevertheless, if the designated beneficiary cannot receive the money because he has died earlier, for instance, and if no alternative beneficiary has been designated, the capital is incorporated to the estate and the two main principles mentioned above will apply.

As one can see, it is unwise to consider that neither the principle of universal succession nor forced-heirship rules apply in cases involving life insurance since they may hit back like a boomerang.

It has been seen that life insurance was an interesting tool because principles of universal succession and forced heirship were applied in a specific way to sums paid under life insurance policy. The peculiar status of life insurance can however lead to practical difficulties. Practical pathways safely lead the practitioner out of trouble if a given succession matter has grown wild.

2 Practical pathways

One can consider forced heirship (2.1) before trying to consolidate the subscriber's wishes (2.2).

2.1 Consider forced heirship

Legifrance translation of Article L132-13 §1 reads as follows: "The capital or annuity payable, upon the death of the contracting party, to a predetermined beneficiary shall be subject to neither to the rules applicable to the returning of property to the deceased’s estate nor to those applicable to the reduction for undermining the portion of the estate allocated by law to the heirs of the contracting party."

The French version mentions the portion attributed to forced heirs or réserve héréditaire. This means that forced-heirship rules should not apply. Nevertheless, §2 of the said Article provides that "Neither shall said rules apply to sums that the contracting party pays in premiums, unless they have been clearly excessive having regard to his possibilities."Courts look at each premium paid to see whether the subscriber had any interest in investing it. Courts also consider the age of the subscriber. Furthermore, if premiums have been paid mainly to avoid forced heirship, §2 will be applied. It is often said that the Cour de cassation does not reexamine facts. One should however bear in mind that the supreme court that deals with civil, commercial, and criminal cases does not reexamine pieces of evidence. It does not hesitate to quash appeal decisions that have not paid a sufficient attention to facts before deciding whether a payment has been excessive. When a decision is quashed, a Court of Appeal has to reexamine the whole matter, especially the facts⁴.

Factual re-assessment of a given matter is needed to determine the subscriber's wishes. Practitioners such as lawyers or financial advisors should therefore try to consolidate the subscriber's wishes.

2.2 Consolidate the subscriber's wishes

The fact that a practitioner should know what the subscriber wishes before investing his client's money may seem too obvious to deserve a post section. Standardisation of forms is used to minimise litigation costs. It however makes the wishes of a given subscriber less obvious since these forms are designed to be used in various circumstances. The Cour de cassation recently decided a case involving a change of the clause that designated the beneficiary⁵. The subscriber was over eighty-five and had forced heirs. She had initially designated one of her children as sole beneficiary. The insurance company did not want to be bound by a contract that excluded forced heirs when the subscriber was over eighty-five. To comply with the company policy, the subscriber has been kindly asked to subscribe to a new contract and to designate each of her children as beneficiary. The son who previously was the sole beneficiary started legal proceedings. His appeal was dismissed. He decided to pursue his claim. The Cour de cassation has ruled that the Court of Appeal had to determine what the subscriber's intention was. The Supreme Court has decided that the matter had to be reexamined. This kind of claims will probably be brought more frequently since artificial intelligence makes it easier to standardise contracts in order to comply with an internal policy for example. It is interesting to note that the internal policy has not been criticised. The form could therefore have been produced more or less automatically with the support of artificial intelligence.⁶ The issue here is that of the link between what the document says and the subscriber's intention. This is a common problem in will drafting since the testament must reflect the true intention of the testator in the sense that he not only has to know what his wishes are, but also that his intention will have certain effects, and that he wants a deed to have these effects.⁷ It is difficult to achieve a satisfactory level of certainty regarding these questions by looking at a standardised form.

It appears that as far as life insurance is concerned, it is of good practice to consider forced-heirship rules even if they do not seem relevant at first glance. Moreover, it is extremely important to make sure that the insurance policy reflects the intention of the subscriber.

In brief, universal succession and forced heirship are two important principles in French law that may be relevant in any context, including in a matter of life insurance. It thus is interesting to consolidate the intention of a subscriber when filling a contract.

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