Guarding Against The Creation Of Statutory Trusts When Assigning Life Insurance Policies As Collateral

Keywords: statutory trusts, life insurance policies, collaterals

Section 13 of the Married Persons Status Ordinance Cap 182 (MPSO) of Hong Kong creates a statutory trust in favour of beneficiaries who are the spouse or children of the life insured. Any insurance monies payable under the policy belong to the trust and are not subject to the insured's debts. This means a lender who takes on a collateral assignment of a life policy subject to a statutory trust should beware - the trust's interests may prevail and if so, the lender may not be able to enforce the life policy as security.

Life Policies as Collaterals and Section 13 MPSO

It is common for financial institutions to accept certain life insurance policies as collateral for loans so that upon death of the life insured or default of the loan, the policies proceeds are used to satisfy the debts owing by the insured. Usually, this is done by way of a collateral assignment of the life policy which purports to provide the lender with the rights and benefits under the life policy so that it can use the policy proceeds to satisfy the debts.

Section 13 of the MPSO does not sit comfortably with the modern trend of using life policies as collateral (which is common among private banking clients). Section 13 provides that if the life policy is expressed to be for the benefit of, or by its express terms purport to confer a benefit upon, the spouse or children of the insured, then a statutory trust is created in their favour. This means if the insured's spouse or children are designated as beneficiaries (or by its express terms purport to confer a benefit), a statutory trust is created in their favour.

Section 13(3) provides that so long as the trust remains unperformed, the insurance monies do not form part of the insured's estate or are subject to the insured's debts. The insured may appoint a trustee or in default of appointment, the life policy is immediately vested in the insured and his personal representatives in favour of the beneficiaries.

The legal title of the life policy vests in the trustee, who owes fiduciary duties to the beneficiaries and must exercise powers under the policy in the best interests of the beneficiaries. Therefore, the insured does not have complete freedom to deal with the policy as he sees fit. In the case of re Fleetwood's Policy [1926] Ch. 48, the insured (who was also the trustee) could not surrender the policy as this was not in the best interests of the...