Founded on two legal relationships, i.e insurance and trust, insurance benefit trust means that the insured, as the trustor, establishes a property right trust by taking his right to insurance claim as the trust property and delivers trust property by designating a trust company as the insurance beneficiary or changing the designation. The special account for trust is used as the account for return on insurance benefits. When the conditions for the payment of insurance benefits are met, the trust company as the insurance beneficiary shall file an application on collecting insurance benefits with the insurance company, administer the application of the trust property, and distribute the profits of trust to the beneficiaries of the trust according to the agreements specified in the trust contract as well as the will of the trustor.
- I. The function and effect of insurance benefit trust
Combining the insurance system and the trust system and integrating the advantages of both, insurance benefit trust has gradually become an important way for high net worth individuals to pass on wealth. It mainly has the following functions:
1. Use the leverage of insurance to lower down the threshold of the family trust. The threshold to establish family trust is generally too high and target only at millionaires and billionaires, mostly high net worth families. The leverage of insurance is highlighted especially in life insurance. In the insurance benefit trust, the insured only needs to pay several hundreds of thousands yuan (RMB) each year. When the insurance accident happens, the insurance benefit flowing into the trust is several times as more as the paid insurance premium. The leverage of insurance is used to lower down the threshold of the family trust.
2. It is conducive to the wealth inheritance in accordance with the will of the trustors. The use of insurance as wealth inheritance lacks long-term planning and effective encouragement mechanism. For instance, in life insurance products, when claim settlement happens, the insurance beneficiary often obtains high insurance benefit once and for all, resulting in the risk that the insurance beneficiary may squander wantonly or the property cannot be effectively managed. In insurance benefit trust, the insurance benefit flows into the trust and managed by the trust company. It is good for the maintenance and appreciation of wealth value. At the same time, individualized trust benefit distribution schemes (such as education, medical treatment, marriage, childbirth and entrepreneurship) can also guarantee the living conditions of children and stimulate children to rise in great vigor.
3. Reduce the moral risk of insurance products. Life insurance takes the death of the insured as the precondition for payment. It implies the moral risk and conflict of interest that relevant beneficiaries may impair the insured to get insurance benefits. In the insurance trust, the insurance benefits flowing into trust will be distributed to beneficiaries according to the trust deeds instead of being paid to the insurance beneficiaries directly. It can effectively reduce moral risks.
- II. Main models of insurance benefit trust
(I) Main models of foreign insurance benefit trust
The insurance benefit trust is quite mature in America, Japan and Taiwan, China. The main models are as follows (refer to the Practices and Enlightenments of Insurance Benefit Trust Home and Abroad issued by General Office of the China Insurance Regulatory Commission):
1. Trust-driven insurance model in America: the trustor establishes the fund trust first, which makes the trust company as the insured and insurance beneficiaries and uses the trust capital to cover premium payment. All insurance benefits are transferred to the trust company.
2. Insurance-driven trust model in Taiwan: the insurance contract is concluded first. The insurance beneficiary, as the trustor, signs a trust contract by taking the insurance benefit as the trust property.
3. Simplified insurance-driven trust model in Japan: the insurance contract is concluded first. The trust contract is concluded by taking the right to insurance claim as the trust property. The beneficiary of the insurance is changed to the trustee to realize the transfer of the right to insurance claim.
(II) Main models of insurance benefit trust in China
Currently in China, the main insurance benefit trusts adopt Japanese models. The insured, as the trustor, establishes a property right trust by taking his/her right to insurance claim as the trust property and delivers trust property by designating a trust company as insurance beneficiary or changing the designation. When the conditions for the payment of insurance benefits are met, the trust company as the insurance beneficiary shall file an application on collecting insurance benefits with the insurance company, administer the application of trust property, and manage, operate and distribute the trust property according to the agreements specified in trust contract. A few insurance benefit trusts adopt the American model.
According to the concluding sequence of the insurance contract and trust contract as well as ways to deliver the claim to insurance benefit as trust property, there are two types of Chinese insurance benefit trusts now. The first one targets at the existing insurance products. That is, the insured has already purchased insurance products and initial insurance beneficiary is not the trust company. The insured delivers the trust property by re-designating the trust company as the insurance beneficiary. The second targets at the new insurance products. In such case, the insurance contract and trust contract are concluded at the same time. Whiling signing insurance contract, the insured delivers the trust property by designating the trust company as the insurance beneficiary.
- III. Analysis of core legal issues of insurance benefit trust
1. On the selection of insurance. According to the trust law, definite trust property is a precondition to set up trust. As to the selection of insurance products, whole life insurance products and annuity products are prepared. Generally, whole life insurance products pay death benefits to the insurance beneficiary when the insured dies, while the annuity products take the existence of the insured as a condition for payment and agree to pay living benefits to the insurance beneficiary. The former features the inevitability of insurance accident while the latter has the definite payment conditions and time. Both of them meet the requirements of trust property for definiteness.
2. On the selection of the trust property and trustor. If the insurance beneficiary is designated as the trustor who takes his/her insurance benefits as the trust property to set up fund trust, when the insurance accident happens, his/her children as the insurance beneficiaries can terminate or change the trust in advance, thus departing from the purpose of the insured. I think the more rational way is to take the right to insurance claim as the trust property. To make it convenient for operation, in insurance benefit trust, the insurance applicant, the insured and trustor of trust can be the same person. After the trustor designates or changes the trust company as the insurance beneficiary, the trustor gives up the right to re-designate insurance beneficiary by contract. If the trustor changes the insurance beneficiary again, the trust contract will be terminated.
3. On the scope of trust property. According to laws and regulations or the contract, in case of the following circumstance, the insurance company needs to return the cash value or insurance premiums to the insured. For instance, the insurance accident happens but doesn’t satisfy the conditions for payment; the insurance applicant reduces the insurance amount; the insurance applicant fails to pay the premiums on time, causing the suspension of the effect of insurance contract, and fails to recover the effect of agreement at the agreed time; the insurance applicant provides false information. The trust property of the insurance benefit trust is the right to insurance claim, so the cash value or insurance premiums refunded or returned by the insurance company are not included in the right to insurance claim. Therefore, it is necessary to define the scope of the trust property and the ownership of cash value or insurance premiums refunded or returned by the insurance company in the trust contract.
4. The impact of the termination of insurance contract on the trust. In the insurance benefit trust in which the right to insurance claim is the trust property, the termination to the insurance contract will directly result in the loss of trust property. As to the insurance applicant’s legal right to terminate insurance contract during the cooling-off period, it can be stipulated in the trust deed as a precondition to set up trust that the insurance applicant doesn’t terminate the effective insurance contract during the cooling-off period. As to the insurance company’s right to terminate insurance contract in case, among that, the insurance applicant fails to fulfill the duty of disclosure, commits insurance fraud and fails to pay the insurance premium on time, the relevant promises and warranty obligations of the trustor shall be defined in the trust deed, which can also define the termination to insurance contract as one of circumstances to terminate the trust.
5. In the insurance benefit trust with long duration, a trust protector can be designated to supervise the trustee, make sure that the trustee manages the trust according to the will of the trustor, and maintain the interests of the trust beneficiaries. There are no prevailing legal regulations on the trust protector mechanism of private benefit trust in China, but based on the principles of the autonomy of private laws, the trustor can designate another relative with full capacity for civil conduct or professionals in legal and financial fields as the trust protector in the trust contract and authorize such a protector to supervise the management and application of trust property.