IHTM20304 - Life Policies: joint life and joint name policies: joint mortgage protection policies

It used to be common for mortgage protection policies to be routinely assigned to the mortgage company so that the policy proceeds went directly to settling the mortgage debt with any balance being payable to the policyholders. Commonly it was a requirement in taking out a mortgage that such insurance was obtained and assigned to the mortgage company.

More recently the requirement to take out mortgage protection policies has disappeared and when they are taken out there is no requirement to assign such policies to the mortgage company. In practice the policy proceeds are normally payable directly to the surviving joint owner.

The case of Smith v Clerical Medical & General [1993] 1 FLR 47 concerned a joint endowment policy taken out to repay a mortgage. The terms of the policy had been amended so that the joint life policy was split into two own life policies so that tax relief was available on the premiums paid. The policy paid out on the death of the first to die and was payable to the estate of the first to die. The policy was assigned to the building society to repay the mortgage. On the death of the first to die the building society did not claim the policy proceeds and the house was sold with the mortgage settled from the sale proceeds. It was held, by the Court of Appeal, that as it was the intention of both parties to the policy that the policy proceeds were to be used to clear the mortgage liability, the decision of the building society not to claim the policy proceeds could not affect the equities between the parties. The survivor had been entitled to receive the house free of mortgage and, as she had settled the mortgage out of the sale proceeds, she was therefore entitled to receive the policy proceeds. Although the policy proceeds were payable to the personal representatives of the first to die, it was clear that the survivor was beneficially entitled to the policy proceeds.

The decisions in Murphy v Murphy [2003] EWCA Civ 1862 and Smith v Clerical Medical & General [1993] 1 FLR 47 make it clear that the intentions of the parties to a joint policy as to the purpose of that policy is crucial in determining where the beneficial interests lie. In general if a joint policy, which is payable only to the survivor, has been taken out with the intention that it should pay off the mortgage, the survivor only takes the benefit of any sums left over once the mortgage has been settled. The mortgage liability can only be taken into account in the estate of the first to die to the extent that the life policy does not cover the mortgage in full.