AIB must change Life Insurance Policy Practice

IT is ironic that as the Scottish Government make plans to introduce a new benefit to alleviate funeral poverty, one of its agencies, the Accountant in Bankruptcy (AIB), has been cashing in on life insurance policies of people that have passed away.

This has led to bereaved families being left with no funds to pay for the funeral costs of their loved ones, sometimes forcing them into funeral poverty.

The reason the AIB has been taking the money is because under Scottish bankruptcy law, the rules state that once someone is made bankrupt all their assets, including interests in life insurance policies, become the property of the trustee in bankruptcy.

So, if someone dies during their bankruptcy, their trustee can take the money from their life insurance policy.

However, because of changes to the law in 2008, it has now been held by the Scottish Sheriff Appeal Court, that between 2008 and 2015, when someone was released from their bankruptcy, the policy became theirs again. After 2015 it returns to them four years from the date of their bankruptcy.

Up until this decision of the court, however, the view of the AIB was the policies belonged to it, even after the deceased person was released from their bankruptcy.

In one case I dealt with, I challenged the Accountant in Bankruptcy’s interpretation of an obscure 105-year old law, arguing that a life insurance policy is what is known as a non-vested contingent interest.

My argument was that a life insurance policy wasn’t payable until someone died, and therefore, the sum assured could not belong to anyone until the death occurred.

The AIB, however, ruled in its own interests.

The only option available to my client was to challenge the AIB through the courts, which meant taking the risk that if she was unsuccessful, she would have to pay for her brother’s funeral and the AIB’s legal costs.

Understandably, the lady chose not to take the risk.

However, the Scottish Sheriff Appeals Court has now held that this obscure area of law does in fact mean that interests in life insurance policies are non-vested contingent interests and are the property of the debtor once they are released from their bankruptcy, if made bankrupt after April 1, 2008; or if made bankrupt after April 1, 2015, after four years.

The question now needs to be asked, how many policies have been cashed in by the AIB after the debtor was released from their bankruptcy?

How many families have been left penniless on the death of a loved one, suffering funeral poverty and possibly debt by a government agency that is supposed to help people in debt?

It is incumbent on both the AIB and the Scottish Government Minister, Jamie Hepburn, to carry out a review of all policies that have been cashed in over the last five years and seek out the families that were denied funds they were legally entitled to.

It cannot be correct that a governmental body be allowed to benefit from its own mistakes, especially when those mistakes left families destitute on the passing of their loved ones.

For a Government that has stated it is intent on tackling the issue of funeral poverty, the first thing it can do is give people back the money that they were entitled to.

First published in The Herald on the 1st September 2018.

Readers Questions

  1. Brian

    I know this is an older post but still relevant. I have 1 small life policy approx £40/month and 3 months into Scottish bankruptcy – no advice was given on this at all so just keep paying. However just been advised, even though this was not ceded/signed over to aib that if I pass away within the 5 years of the start of the bcy that zero of the payout from the policy will go to my family even to cover funeral costs – so why am I paying this? Policy was orig to cover outstanding mortgage for my parter who has the mortgage in their name. it has no surrender value – on death only benefit.
    Please advise. Thank you

    1. Scottish Adviser Post author

      Hi Brian

      It would be abandoned in law by the Trustee after 4 years from the date of your bankruptcy, but if the benefits of it haven’t been put into trust for your beneficiaries (that is you have not assigned them to be the people who should get the money when you took out the policy -look at the policy), then if you pass away within those 4 years, it goes to the Trustee.

  2. Gary

    I’m thinking of declaring bankruptcy and have 2 life insurance policies. Can the official receiver take any monies if I were to die after 4 years had passed from being discharged. Thanks

    1. Scottish Adviser Post author

      Hi Gary

      If you have life insurance policies and you are made bankrupt, if you were to pass away, the proceeds can go to the Trustee if you pass away within 4 years of your bankruptcy. However, if they are held in Trust, so that the payments are made directly to someone you have named as a beneficiary, the funds should not go to the Trustee. If you don’t pass away within 4 years of your bankruptcy, the Trustee should abandon his interest in your policies when he is discharged from office.

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.