Chapter One

General orientation

1.1 Introduction

Before directly going to the other description of the proposal of the thesis it is better if I
describe organization of the study shortly as follows.

Chapter one mainly focuses on; background of the study, statement of the problem, objective
of the study, significance of the study, research methodology, and scope of the study.

In chapter two my paper gives the definition of life insurance, the need and advantages of
life insurance, the beneficiaries of life insurance, the general principles of life insurance, the
components of life insurance, and the concept life insurance under Ethiopian relevant laws
with regard to Ethiopian laws of successions and insurance laws is discussed.

Under chapter three my thesis focuses on the theoretical and philosophical foundations of
successions of life insurance, the experiences of other jurisdictions on successions of life
insurance in general and under Ethiopia in particular and successions of life insurance in case
of Ethiopian laws and in this the inheritability of life insurance and the point of contradiction
of Ethiopian relevant laws with regard to appointment of beneficiaries of life insurance with
regard to case analysis is added.

Chapter four of this thesis deals with conclusions and recommendations.

1.2 Back ground of the study

The historical development of life insurance throughout the world in general can be explained
as follows. An early form of life insurance dates to ancient Rome; Burials clubs covered the
cost of member’s funeral expenses and assisted survivors financially. Even if it was not
organized in a well manner the concept of life insurance appeared in ancient Rome. The
neighbor assist the families of the deceased whether children or spouse of the deceased and
also the close relatives of the deceased.

What the ancient Romans called Burials club cover the costs of the members of funeral
expenses and assisted the families of the deceased. The Presbyterian synods in Philadelphia
and New York City created the corporation for the Relief of poor and distressed widows and
children of Presbyterian ministers in 1759; Episcopalian priests organized a similar fund in

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1769. Between 1787 and 1837 more than two dozen life insurance companies were started,
but fewer than half a dozen survived. In the 1870,military officers banded together to found
both the Army (AAFMAA) and the Navy mutual Aid Association(Navy mutual),inspired by
the plight of widows and orphans left stranded in the west after the battle of the Little Big
Horn, and of the families of United States of America sailors who died at sea.

Even if it is difficult to get organized information about the historical development of life
insurance in Ethiopia it is better if commercial code of Ethiopia is referred and some concepts
are obtained. It was incorporated in Ethiopian commercial code and began to be governed
under the commercial code. There were only few companies engaging in the activity of
contract of life insurance from the beginning of its introduction to our country up to the
recent time. The share of life insurance in the total gross premium fluctuates from time to
time.

Generally, there was no well-organized information about the historical development of Life
Insurance in Ethiopia. Only two Life Insurance Companies were providing or offering Life
Insurance Policies at the time when the Ethiopian Commercial code of Ethiopia come into
force. These insurance Companies were named as the Ethiopian Life Insurance Company and
Ethio-American Life insurance Company. Also during the Derg regime there was no
significant development of Life Insurance Companies.

Currently in Ethiopia very few Insurance Corporation, offer Life Insurance or related
products (based on information available on their official websites). The number of life
insurance in Ethiopia is very small as the number of life insurance companies has retained
relatively stable. There are now a total of nine companies licensed to underwrite life
insurance.

Next to this, the issue that must be dealt is about the development of concept of succession of
life insurance. Under the course known as Ethiopian law of succession under article 827 of
civil code describes about things which forms or that make up inheritance for the heirs of the
deceased person. In listing those things which forms part of the successions of it arises about
life insurance. But to solve the issues of succession of life insurance only interpreting the
provision of civil code is not enough. The issues of insurance in general and that of life
insurance in particular are dealt under commercial code of Ethiopia. Since the civil code
which deal with successions of the deceased arise about life insurance whether it forms part

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of inheritance or not, it is possible to connect it with the commercial code of Ethiopia. In this
case issues of life insurance and its successions can arise.

Life insurance can be an important asset to have, no matter where you are in life. The main
purpose of life insurance policy in the event of death was almost believed that to protect the
members of the immediate family of the insured against sudden deprivation. This is justified
by economic and social conditions. The importance is that his death meant a serious
economic crisis for his dependents since the man was, more often than not, the sole bread
winner. To overcome this problem of economic crisis men look out life insurance. Succession
beneficiary clause is a provision in a life insurance policy that establishes the procedure for
revoking a current designated beneficiary and designating a success or a beneficiary.

The right to successions of life insurance is a controversial issue among liberal developed
western countries and under the provisions of the commercial code and other laws of Ethiopia
that are currently enforce . Since the Ethiopian legal system is categorized under continental
legal system the problem which faces other countries (followers of civil law legal system)
may also faces Ethiopia regarding interpretation of provisions related to successions of life
insurance.

Depending on the provisions considered under Ethiopian commercial code and Ethiopian
civil code it is possible to identify the problem but still the interpretation of those provisions
is questionable issue. In provisions of these laws there are contradictions which cannot be
solved simply by the interpretation of these provisions. Now a day, it is unquestionable fact
that; insurance of life is important in commercial transactions. This interaction is governed by
legal rules and insurance policy provisions. However, there are gaps in the laws and this
gives rise to a difference in interpretations by the courts.

1.3 Statement of the Problem

A person can enter into a contract of life insurance for the benefit of specific beneficiary.
This is clearly incorporated under article 701(1) of Ethiopian commercial code of Ethiopia.
The beneficiaries are only those heirs whose name is mentioned in the contract according to
article 701(1) of commercial code. In such a case, the insurance will not be part of the
inheritance and it cannot be part of the succession. Insurance is deemed to be made for the
benefit of his heirs, when he mentions the beneficiary in general terms like my heirs, my
successors and the like. Thus whatever the deceased made insurance for the benefit of his

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heirs without making any other indication, then it becomes the part of the succession of the
deceased, and those persons who have capacity to succeed the deceased may collect the
benefits. The second situation where monies due for the performance of life insurance can be
part of the succession of the deceased is according to article 827(1) of civil code of Ethiopia
is where the deceased did not mention whose for whom the life insurance is made. Whenever,
the deceased has not determined the beneficiary in the insurance contract, then it is taken as
part of the inheritance of the deceased. In other conditions, (whenever the beneficiary
determined or whenever he made his heirs the beneficiary by indicating their name then the
money due shall not be part of the estate of the deceased.

The issue of life insurance may not be resolved by interpreting and enforcing article 827(1)
of civil code of Ethiopia. Because, to solve issues involved the rules enshrined in civil code
should be seen in light of the rules enshrined in the commercial code of Ethiopia that govern
life insurance policies Article 701(1) of the commercial code declare that insurance in event
of death can be made for a specified beneficiary. This provision is harmonious with the
provisions of article 827(1 and 2) of civil code because wherever the deceased mentioned a
particular beneficiary or the name of one of the heirs, then, the money due of life insurance is
not part of the deceased estate. The problem is highly manifested in interpreting and
enforcing article 827(1) of the civil code and article 701(2) of commercial code of Ethiopia.
Because article 701(2) of commercial code declared “Notwithstanding that they are not
mentioned by name:

(a) The subscriber’s spouse, even where the marriage took place after the policy was
entered into;

(b) The subscriber’s children, whether or not born at the time when the policy is entered
into. These provisions of the commercial code have a conflicting message from that of article
827(1) of the civil code, whenever, the deceased does not determine the beneficiary or makes
his heirs the beneficiary, the money becomes part of the estate of the deceased.

The existence of these two provisions or rules to govern the money due in performance of life
insurance where the beneficiaries are not specified has been the cause of dispute regarding
the successions of life insurance. Disputes have been arising between the wife or the husband
of the deceased and the children’s of the deceased. Because wife is not an heir of her husband
under the succession law of Ethiopia. Thus, whenever, the beneficiary is not specified, the
spouse is considered as a specified beneficiary according to article 701(2) of Ethiopian

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commercial code. In this case the children of the deceased may invoke article 827(1) of
Ethiopian civil code to exclude the wife or husband of the deceased. Thus the wife or the
husband may argue to exclude the heirs and to get the benefits of the insurance on the basis of
article 701(2) of the Ethiopian commercial code.

When the heirs of the deceased are his descendants other than his children or his ascendants
and their representative they will base their claim to get the benefits of the insurance in
accordance with the rules enshrined under article 827(1) of civil code while the husband or
the wife of the deceased argue to become beneficiary in accordance article 701(2) of
Ethiopian commercial code. The interested parties can invoke the provisions they believe in it
and they may run to win the case. Since the provisions clearly contravene each other it is very
difficult on interpretation and enforcement. These two provisions are contradictory and this
problem needs solution.

Identifying whether life insurance is inheritable under Ethiopian law or not is the main issues
that must be considered seriously. By simply interpreting the provisions incorporated under
Ethiopian civil code it is difficult to say whether life insurance is inheritable or not because
there is special laws that deals with this issue which is commercial code of Ethiopia. So the
question is unsolved yet. Identifying the beneficiary under the Ethiopian relevant laws is
another important issue and that person specified by the subscriber to become beneficial from
his or her life insurance policy is considered as beneficiary.

The experiences of other countries on the inheritability of life insurance must be seen in this
thesis. The experiences of other countries regarding to the successions of life insurance can
be incorporated and how they manage issues related to succession of life insurance.
Therefore, this thesis focuses on examining how and to what extent the insurance laws
protect the rights of spouses and children regarding to life insurance laws when beneficiary is
designated by the insured within the country existing legal frame works.

When article 701(1) of Ethiopian commercial code and article 827(1) of Ethiopian civil code
is applied and the heirs of the insured is excluded from becoming beneficiary of the policy of
life insurance the successions of life insurance cannot be achieved and also the primary
purpose of policy of life insurance- which is assisting the members of the family of the
insured in case of death of the insured cannot be achieved.

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1.4 Objectives of the Study

1.4.1 General Objectives

The general objective of this research is to examine the challenges of inheritability of life
insurance and to find out the way this challenge will be controlled. In case life insurance and
its inheritability different question may be raised since we have provisions which contradict
each other and these provisions may create a question on the judges who appointed for the
interpretation of the laws related to inheritability of life insurance and other laws. Also the
conflicts may arise even among the father and the children or among the mother and the
children of the deceased. So the general objective of this thesis will focuses on finding the
way that rectify the problem of inheritance of life insurance.

1.4.2 Specific Objectives

To achieve the general objective of this research, this research will have the following
specific objectives;

 To analyze the beneficiaries of life insurance.

 To analyze the power of subscribers of life insurance.
 To analyze the need of life insurance and its advantage.
 To analyze the challenge of designating a beneficiary other than the heirs.
 To analyze whether life insurance is inheritable or not.

1.5 Significance of the Study

This paper may give literal understanding on the challenge of designating beneficiary of life
insurance other than the heirs of the subscribers and its constraints which can impose
challenges on successions of life insurance on descendants and spouses of the subscriber.
This thesis may play an important role in finding the solution for the provisions which
contradict each other regarding to inheritability of life insurance by initiating the law makers
for the rejection or amendment of such provisions.

Also this paper has an aim of reducing the challenge of the right of the subscriber’s right
(liberty) on the designation of the beneficiary of life insurance other than heirs but in addition
to this the purpose for which the life insurance contract needed to be created which is
financially supporting the members of the insured after the death of the insured must be
rejected..

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In addition to these the readers of this paper can think over this very questionable issue and
can play their own role in reducing such kind of problem by initiating the law makers of the
country. Also those companies which engage in life insurance contract can understand from
this paper the existence of such kinds of contradiction and may play their own role in the
amendment of such kinds of provisions. Generally, the readers of this thesis can understand
the existence of contradiction of the laws of Ethiopia regarding to inheritance of life
insurance and this enable the readers of this paper to think over it and this may encourage
them to ask for the amendment of such kinds of contradiction

1.6 Research Methodology

The study is doctrinal research due to this reason it is methodologically designed to be carried
out from the perspective of legal analysis. The doctrinal legal research is a research into legal
doctrine through analysis of statutory provisions and cases by the applications of power of
reasoning. It provides the tools needed to reach decision on an immense variety of problems
usually with very limited time at disposal. Both primary and secondary sources of
information are employed.

Primary sources are the sources that contain original information. Such information can be
collected directly from the person having such information or can be found in research papers
published in legal periodical/journal, reports, theses and conference papers. Also in the
primary sources documents such as civil code, pertinent legislations such as commercial code
are used. While secondary sources of information furnish the information derived from
primary sources. These sources organize the information in a systematic manner and in a
planned way. These include textbooks, treaties, and commentaries on the statute,
bibliography, dictionaries, encyclopedias and reviews. In addition to these secondary
sources, articles, different review, case analysis and websites are reviewed for the fruit
fullness of this thesis.

1.7 Scope of the Study

Life insurance may take any of three forms. First is the case of insurance for the event of
death in which a beneficiary will be compensated when the insured person dies. Second,
the risk of living a long life beyond a certain age is also considered for insurance purposes as
a risk on life since old age due to a prolonged life brings diminished ability to work and earn
one’s livelihood. Hence, a person may subscribe to a life insurance policy where the insurer

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undertakes to pay a specified capital or life interest provided the insured person is alive at a
date fixed in the policy. Lastly, there is a life insurance known as a combined policy,
where the insurer undertakes to pay the insured person a specified sum at the end of a fixed
period of time, or to the specified beneficiaries where the insured person dies. However,
for the purpose of this research I selected the first form of life insurance, i.e. life insurance on
the event of death.

The scope of this research may not be limited to Ethiopian legal system as the researcher uses
certain comparative study of other jurisdictions. It primarily focuses on the Ethiopian
commercial code and other laws. In addition, the insurance laws of other jurisdictions have
been considered under this research in order to compare the Ethiopian laws with other
jurisdictions.

The main issues that must be covered under this paper is about the Ethiopian laws related to
successions of life insurance in Ethiopian civil code and the provisions existed under
commercial code of Ethiopia that means that of 1960 commercial code. Even if the study is
related to the issue of inheritability of life insurance in case of Ethiopian civil code and
Ethiopian commercial code the study do not include those provisions which are not
contradictory to each other regarding the succession of life insurance. That means for
example the provisions incorporated under article 827(1 and 2) and article 701(1) if
commercial code is harmonious to each other. So there is no need of bothering about these
two provisions.

So as a researcher my research focuses on the provisions which are contradictory to each

other that means it focuses on provisions article 701(2 a and b) of Ethiopian commercial code
and article 827(1 and 2) of Ethiopian civil code in analyzing whether the children and
spouses of the insured become beneficiary or not from the life insurance policy.

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 Chapter Two
Literature Review
Under this chapter the definition of insurance in general and that of life insurance in
particular is going to be forwarded depending on the suggestion of some scholars and
definition from different legal provisions and from different sources. Also under this chapter
the need and advantages of life insurance is going to be provided, in addition to this the
principles and eligibility of beneficiary of life insurance policy, beneficiaries of life insurance
and the right of proceeds of a life insurance policy, nature of assignment in general,
components of life insurance policy and the concept of life insurance policy under relevant
Ethiopian laws are provided.

2.1 Definition of Insurance in General

Insurance is an act of insuring or being insured against loss; a system of protection against
loss in which a number of individuals agree to pay certain sums (premiums) periodically for a
guarantee that they will be compensated under stipulated conditions for any specified loss by
fire, accident, death, etc.1
Insurance also can be defined in various ways.
Firstly, from the point view of an individual it may be defined as a risk transfer mechanism or
an economic device whereby a person, called the insured/assured transfers a risk of a possible
financial loss resulting from unforeseeable events affecting property, life or body to a person
called the insurer for consideration.2

Secondly, from the point of view of the insurer, insurance may be defined as a mechanism
through which a risk is distributed among the group of persons who are exposed to the same
type of risk, i.e., persons who bear the risk of suffering a financial loss as a result of events
affecting property, life or body.3
Next to this the definition of a contract of insurance will be forwarded.

1
Micheal Angels, Webster’s New world college dictionary fourth edition
2
Fasil Alamayehu and MerhatbabTeklemedin, Law of Banking, Negotiable instruments and Insurance,
sponsored by the justice Institute, 2009 page 115.
3
Ibid

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2.2 A Contract of Insurance

A contract of insurance is a contract whereby one party undertakes, in return for a

consideration called a premium, to pay to the other party a sum of money on the happening of
a certain event (death or attainment of a certain age, or injury) or to indemnify the other party
against a financial loss arising from the loss or damage to property or from incurring civil
liability.4

A contract of insurance is a type of contingent or conditional contract. As the name indicates,

a contingent or conditional contract is a contract to do or not to do something, if some event,
collateral to such contract, does or does not happen.5 In other words, it is a contract in which
the performance of the obligation arising there from by the parties or one of them is
dependent upon the condition or contingency agreed upon by them.6

2.3 Definition of Life Insurance

Life insurance is an insurance in which a stipulated sum is paid to the beneficiary or
beneficiaries at the death of the insured or if specified, to the insured at a certain age.7

The provisions concerning life insurance are therefore found within the Commercial Code,
under section 2 of chapter 4, title III. Article 691 defines Life insurance as “contract where
by the insurer undertakes against the payment of one or more premiums to pay to the
subscriber or to the beneficiary a specified sum on certain conditions dependent upon the life
or death of the subscriber or third party insured.”8 From this definition, it may be deduced
that life insurance is a contract between the policy owner and the insurer. The policy owner,
sometimes also called policy holder is the person who has the right to exercise control over
the policy.9 He is usually, but not always, the person paying the premium.10 For example,
when one insures one’s own life for one’s own benefit and pays the premiums one self, such
person is said to be the policy owner as well as the insured and beneficiary.

4
Id at 121
5
Ibid
6
Ibid
7
Supra note at 1
8
Commercial Code of the Empire of Ethiopia proclamation No.166/1960, Neg. Gazetta Extra-Ordinary Issue,
No.3 Article 691 (Hereafter referred to as “Commercial Code).
9
R.Nader and W smith winning the insurance Game (1993,Doubleday) at 272
10
Id at 271

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However, if a man insures the life of his wife for the benefit of their children and pays the
premiums himself, then he is the subscriber whilst his wife and children are the insured
person and beneficiary respectively. It can therefore be seen that there are two parties in a life
insurance contract the insurer and the subscriber.11 The insurer is obviously a legal entity that
agrees to pay specified sum up on the happening of a given contingency known as death to
named beneficiaries. The subscriber signs the contract of insurance and can be, but is not
necessarily, the insured.12

According to the definition envisaged in article 691, the insurer undertakes to pay specified
sum to the beneficiary upon the death of the insured, alternatively the insurer promises to pay
specified sum to the policy owner if the latter is alive after a certain specified period of
time.13There are however, times when life insurance for the event of death is made by a third
party while the insured person is another person. This situation is covered by article 693
which requires that such an arrangement has the written agreement of the insured, with an
indication of the amount insured. If the insured is a married person, consent of their spouse is
also required.

It would not be untrue to claim that human life is full of ups and downs which are definitely
beyond everyone’s control. For this reason depending on the kind of policy being selected,
life insurance is said to provide financial support for beneficiaries named in the policy.14 In
particular, it is meant to protect members of a family from the financial consequences of the
death of the bread winner.15

Another peculiarity of life insurance is that it is not a contract for indemnity in the strict
sense. That is why article 689 states that contract for insurance of persons (i.e. life insurance
and insurance against accident and illness) shall not be presumed to be a contract for
compensation.

11
The Amharic Version says genzebkefayu, which means the policy owner.
12
This is called life insurance for the event of death see art 692(2)
13
This is called endowment insurance see art 691(1)
14
Supra note at note 9 at 264
15
Ibid

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As human life, body and health are invaluable the amount can freely be fixed and is due
irrespective of the damage suffered by the insured person. Additionally, life insurance policy
is regarded as property.16

But the provision of book III of the Civil Code and the 2000 Revised Family Code of
Ethiopia (The Revised Family Code) do not explicitly say that it is property. If a life
insurance policy is considered to be the property of the insured person, it can be assigned to
other persons. According to article 698 of Commercial Code, the written agreement of the
insured person is required for the valid assignment of a life insurance policy.

Life insurance for the event of death can be used as collateral (such as pledge as depicted in
article 697) to secure a loan from a bank. Furthermore, when one borrows money from a
financial institution, the bank may take out a life insurance policy on the life of its debtor, so
that accrued debts will be paid if he dies.17

Life insurance is a contractual agreement between a policy holder and life insurance
company. Policy holders agree to pay your beneficiaries a sum of money if you die. All life
policies have a minimum of 4 parts: a premium, death benefit, and term period and/or cash
value. It is a way of providing income replacement for financial dependents (the
beneficiaries) after the insured person dies.18

2.4 The Difference between Life Insurance and the Rest of Insurances.
2.4.1 Difference Regarding To Insurable Interest.
In Life Insurance Insurable Interest must exist at the time of inception of Insurance and it is
not required at the time of claim. In Marine Insurance Insurable Interest must exist at the time
of loss / claim and it is not required at the time of inception. In Property and other Insurance
Insurable Interest exist at the time of inception as well as at the time of loss/ claims.19

16
Couch Couch cyclopedia at insurance laws, at 83
17
M Tsegaru“The determination of beneficiaries of a live insurance policy” (2006, Ethiopian Bar Review 35. At
51
18
Http/www.my life insurance quetes.123.com/life insurance definition.
19
www.nio.ac.in/media/documents/voclnessrvies

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2.4.2 Difference Regarding To Easiness of Assignability to another Party

A property insurance contract is a personal contract (which means the contract is between the
insured and the insurer), it normally cannot be assigned to another party without the insurer’s
consent. If property is sold to another person, the new owner may not be acceptable to the
insurer. Thus, the insurer’s consent is normally required before a property insurance policy
can be validly assigned to another party. Since the general rule states that one cannot be
forced to contract against one’s will, the right of the insured to assign the policy is dependent
on the consent of the insurance company. Otherwise, the company could not be legally bound
in a contract with an individual to whom it would never have issued a policy originally, and
one in which the nature of the risk is altered substantially.20

In contrast, a life insurance policy can be freely assigned to anyone without the insurer’s
consent because the assignment does not usually alter the risk and increase the probability of
death.21

2.4.3 Difference Regarding To Indemnity Principles

The word indemnity means to restore someone to the same position that he/she was in before
the event concerned took place. This principle is applicable to the fire and marine insurance.
It is not applicable to life insurance, because the loss of human life cannot be restored.22

2.4.4 Difference Regarding To Doctrine of Subrogation

The doctrine of subrogation is a corollary to the principle of indemnity and as such, it applies
only to property insurances not to life insurance. According to the doctrine of subrogation,
the insurer, after indemnifying the insured for his loss in full, steps into the shoes of the
insured and is subrogated to all the alternative rights and remedies that the insured has against
the third persons, until the insurer recoups the amount he has paid under the policy.23

The primary purpose of subrogation is to make sure that insurance is a means of

compensation or reinstatement of the insured who has suffered a financial loss and not a
mechanism to make a net profit out of loss or damage covered by insurance. It denies the
insured the opportunity to claim payment twice, from the insurer on the basis of the contract

20
Supra note 2 at 126
21
Ibid
22
Id note at 141
23
Id at 147

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of insurance and the third party who is responsible for the loss or damage to the insured
object on the basis of tort law, for instance, and thereby making a net profit.24

Secondly, it is also intended to make sure that the third party /the tort feasor/ does not escape
liability because the owner of the property happens to have insurance and bears the
consequence of his negligence or intentional act.25

2.4.5 Difference Regarding To Doctrine of Contribution

Like the doctrine of subrogation, the doctrine of contribution also applies only to contracts of
indemnity, i.e. to property insurances it is not applicable to life insurance contract. The
doctrine of contribution states that in case of double insurance all insurers must share the
burden of payment in proportion to the amount assured by each. If an insurer pays more than
his ratable proportion of the loss, he has a right to recover the excess from his co-insurers,
who have paid less than their retable proportion.26

2.4.6 Difference Regarding To Period of Termination of Contract of Insurance

In life insurance, the beneficiary/beneficiaries receive the payable benefit due to the death of
the insured once this transaction occurs, the policy is terminated. Conversely, property and
casualty can have multiple compensations (claims processed) and the policy may continue in
force or be terminated with the payment to the insured. For example, on an insured property
the insurance policy can have two different events such as theft and flood due to rainfall and
they would both be covered.27

2.5 The Similarities between Life Insurances and Other Types of Insurances

2.5.1 The Similarity Regarding To the Utmost Good Faith Principle

The general rule of ‘caveat emptor’ (let the buyer beware), which applies to ordinary trade
contracts, does not apply to insurance contracts. Insurance contracts are contracts of utmost
good faith or uberrimae fidei. Accordingly, it is the inherent duty of both parties to a contract
of insurance to make full and fair disclosure of all material facts relating to the subject matter
of the proposed insurance. It is so because insurance shifts risk from one party to another. A
material fact for this purpose is a fact, which would affect the judgment of a prudent insurer

24
Ibid
25
Id at 150
26
Id at 152
27
Alicia Ormaza, Differences between Life Insurance and Property & Casualty Insurance, 2015

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in considering whether he would enter into a contract at all or enter into it at one premium
rate or another. For example, in life insurance suffering from a disease like asthma or
diabetes is a material fact whereas having occasionally a headache is not a material fact.28

2.5.2 Similarity Regarding To Payment of Premiums for Consideration

In terms of the insurance company, life insurance is a way to transfer the financial risk
attached to the loss of life or health of an individual to a group of individuals, exposed to the
same risk. In terms of the individual, life insurance can be defined as an agreement through
which the insured pays a certain amount of money – the insurance premium – and in
exchange to that the insurer will pay a certain amount of money – the insured sum – in case
of death or compensation. The same is true for other types of insurance in case loss of
property occur.29

2.5.3 Similarity Regarding To Formation of Contract of Insurance/Formality

Requirement

Among contracts that should be made in writing contract of insurance is mentioned as

contracts required to be made in writing by law. This formality requirement cannot be
omitted because it is required by the law. Since life insurance is insurance it is not an
exception to this rule, even if it has its own peculiar features.30

2.6 Need and Advantages of Life Insurance

When the question arise concerning who will take care of my family if tomorrow something
unfortunate happens to me, then life insurance is the answer. Under any circumstances, the
loss of a loved one is a traumatic experience. But, if your family is also left without sufficient
money to meet basic living needs or prepare for future goals, they will have to cope with a
financial crisis at the same time.31 From the following it is possible to identify the advantage
of life insurance.
2.7 Advantages of Life Insurance
Life insurance provides an infusion of cash for dealing with the adverse financial
consequences of the insured’s death.

28
Id at 137
29
Oana Claudia ionescu, life insurance, their characteristics, importance and actuality on the Romanian market,
2012
30
Ethiopian civil code article 1725(b)
31
www.ic.ciprulife.com/public/life-plans/keybenefits,htm

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Life insurance enjoys favorable tax treatment unlike any other financial instrument32.
 Death benefits are generally income tax free to the beneficiary.
 Death benefits may be estate tax free if the policy is owned properly.
 Cash values grow tax deferred during the insured’s life time.
 Policy loans are income tax free.

A life insurance policy may be exchanged for another life insurance policy (for an annuity)
without incurring current taxation. All of the above statements are generally true; however
the tax benefits of life insurance have certain limitations which under the wrong set of
circumstance can cause the tax benefits mentioned to be lost. Beyond the familiar death
benefit, permanent life insurance has several valuable advantages that can both expand and
protect your financial security. There are additional opportunities life insurance can offer.33
These are:

1. Access to Cash- once it accumulates your life insurance cash value is accessible through
policy loan or withdrawal for family and business opportunities, education funding,
retirement income, emergencies, or to pay policy premiums.34

2. Asset Protection- life insurance can offer financial fall back when needed and offset the
impact of estate taxes upon your death. The death benefit also can provide surviving family
members with funds they need to live comfortably and help achieve their goals.35

3. Consistent and Safe Accumulation –permanent life insurance cash values are
guaranteed, meaning you will always have access to the assets you accumulate.

4. Flexibility with Less Restriction- You can access your accumulated cash value without
restrictions that exist on other assets.

5. Long term Financial Security for You and Your Family and protected Insurability- as
long as premiums are paid, permanent life insurance provides coverage throughout your life,
even if health or personal situations change. Life insurance can be an important asset to have,
no matter where you are in life. If you have a family of your own, life insurance can help
your family survive financially. And for retires, life insurance can benefit surviving family

32
https://www.gatewayfinancial, biz node//thirty three.html
33
www.forbes.com/sites./six ways. Life insurance can. Benefit. You.
34
Ibid
35
Ibid

16 | P a g e
members, can be used to support any funeral expenses, or , for some kinds of life insurance,
can be used to fund activities like college tuition or a down payment on a house .Here are
strong advantage to having life insurance.

Death in the family can leave members insecure emotionally and financially and uncertain
about their future. But having term or permanent life insurance can smooth over the transition
and provide your family with financial assistance as they adjust potentially to anew income
level, especially if you are the primary supporter of the family. If you and your spouse are
planning to support your children’s college education in the future, life insurance can allow
your spouse to achieve this goal if something were to happen to you.36

Funeral expense can set any family back, no matter if you are young and single or retired and
married. Costs for services can fluctuate greatly depending on if you are cremated, buried,
have a full funeral service or just gravesite gathering.37

As you grow older and accumulate more property or expand your estate you might want to
investigate the taxes your heirs would be assessed upon your death. It would be an advantage
for your heirs if you had life insurance to cover those inheritance taxes so they would not
have to come up with the money themselves or sell some of the estate.

2.8 Beneficiaries of Life Insurance and the Right of Proceeds of a Life Insurance Policy.
Beneficiaries are those persons who are particularly named in a life insurance policy to
receive the proceeds should the contingent event occur. According to G couch, a beneficially
refers to One who receives a benefit or an advantage, or who is entitled to the benefit of a
contract that is, the one to whom the insurance is payable or who is entitled to the proceeds of
the policy or certificate, or the benefits of an insurance fund, on the occurrence of the event
designated. Any person, whether by assignment or otherwise, entitled to take under a policy
of life insurance, is in a broad sense, a beneficiary.38

From this definition a beneficiary so designated can be understood in a clear way in the
policy is the person who is entitled to receive proceeds of a life insurance policy. It is obvious
that the beneficiary is not a party to the contract; he is entitled to be paid agreed sum of

36
https://www.all.all.state.com/tools-and resources/financial/life-insurance.advantages.aspx
37
Ibid
38
G couch couch cyclopedia of insurance law( vol.4,2nd ed,1960.The lawyers co-operative pub co) at 489

17 | P a g e
money up on the death of insured. With respect to the rights of beneficiaries , a reading of
article 692(2) and 695(b) reveals that beneficiaries specified by their first names and
surnames in the policy are entitled to receive the insurance money up on the death of the
insured.

The beneficiaries’ right to the proceeds of a life insurance policy also can be determined from
the content of the policy and is subject to all the provisions and limitation of the policy.39 A
designated beneficiary can exercise his right to the proceeds of a life insurance policy when
the risk insured against materializes up on the death of insured person.

So the life insurance policy matures at the times of death of the insured person and according
to article 706(1) the beneficiary may claim directly against the insurer. In order to exercise
his right over the proceeds of the life insurance policy the beneficiary must be alive.
However, is the specified beneficiary supposed to be alive at the date of insured person’s
death what if the beneficiary who was alive but passed away before getting paid? Do the
insurance proceed revert to the estate of the insured person? In such cases, the capital to be
paid by the insurer forms part of estate of the insured person if the specified beneficiary is not
a live at the date of the insured person death.40

If the specified beneficiary is alive on the date of the insured person’s death, he can start
exercising his right to claim payment of the proceeds of the insurance policy from the insurer
as from that date. Article 702 Commercial Code states that the benefit shall be deemed to be
payable only on the condition that the beneficiary is alive on the day when the capital or life
interest is to be paid; the day from which the capital or life interest is to be paid is the date of
the insured persons death, because a life insurance policy matures exactly on this date.

Thus, if the beneficiary who was alive on the date of the insured persons death dies before
collecting the capital or life interest to be paid by the insurer, then the proceed of the policy
devolve upon the legal heirs of the beneficiary.41The right of beneficiaries to the proceeds of
the policy depends largely on their agreement to the policy. If they agree that they would
exercise their rights in the policy, it would be payable upon maturity; in such cases the

39
Id, at 491
40
See art 705 of the commercial code and art 827 of the civil code
41
See article 702 of Ethiopian commercial code

18 | P a g e
insured person does not have the chance to revoke the rights of a beneficiary who has already
agreed to the policy.42 However, the insured party can revoke the allocation of the benefit of a
policy to a specified beneficiary where the latter is late in expressing his agreement or does
not express his agreement at all. So, the specified beneficiary should act within a reasonable
period of time in order to exercise his right. Otherwise he may have to suffer the
consequences of revocation.

That is why the provisions of article 703(2) provide that the rights may be revoked until such
time as the beneficiary has agreed to the policy. It seems that article 703 adopts the
beneficiaries’ agreement to the life insurance policy as a criterion to differentiate between
revocable and irrevocable beneficiaries. Apart from whether the beneficiary has expressed his
agreement, it would be reasonable to consider the beneficiary`s motive.

In the law of succession, if descendants of a testator are interested in his death so that they
can inherit his estate, the testator can, by inserting a provision of his will, disinherit the
descendants due to their bad motive which may be considered as justifiable reason.43 So by
analogy, the bad motive or ill-intent of the beneficiary can be taken as a reason for revoking
allocation of the benefit of a life insurance policy.

Contrary to article 703(1), which recognizes on irrevocable beneficiary, the Ethiopian

insurance corporation`s nomination of Beneficiaries form states that the insured’s right to
change the beneficiaries is reserved. That is, whether or not the beneficiary agrees, the
insured party can revoke the allocation of the benefit of a policy to a specified beneficiary.

The beneficiary therefore has no vested or indefeasible interest during the life time of the
insured, but only a revocable expectancy contingent upon being a beneficiary at the time of
the insured’s death.44 Since the law must prevail over this inconsistent provision in the
Nomination of Beneficiary form, it is interpreted to mean that the insured person can exercise
his right to change the beneficiary when the latter is late in expressing his agreement, does
not express his agreement at all or does not at all know that the relevant insurance benefit
exists. Once a beneficiary has agreed to the policy, their right to the proceeds is preserved.

42
See art 938 of Ethiopian civil code
43
Ibid
44
Supra note 40 at 561

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However, one must not overlook that beneficiaries cannot have greater rights than those
provided by the contract, regardless of whether they have knowledge of the contents of the
policy or even of the policy itself.45

2.9 Eligibility of Beneficiary of a Life Insurance Policy

When a person takes out an insurance policy on his life, he must be careful in selecting and
designating a beneficiary. That is why the Ethiopian insurance corporation advices its
customers to specify only those beneficiaries who have an insurable interest in their lives, in
particular the spouse and children or legal heirs, for fear of a contact of interest between
specified beneficiaries and non-designated heirs at the time of any claim.46

Some scholars, however, argue that the insured has wide freedom in the designation of a
beneficiary. It has, for example, been propounded that-the insured is unrestricted in his
selection of the beneficiary of his insurance and the law will not review the propriety or
desirability of his selection.47 The insured may therefore take out a policy of insurance on his
own life and is at liberty to make it payable to anyone, he pleases. For instance, he may
specify his aunt, uncle, mistress, etc., as beneficiaries. It is important, however, to determine
primarily who the eligible beneficiaries are or should be. This may be done by testing against
the doctrine of insurable interest: that the question of eligibility is in effect nothing more than
holding that the requirements as to insurable interests are satisfied.48

Hence, for a given beneficiary to be named in the policy he must be eligible to be a

beneficiary in the first place, in the sense that he must have the required insurable interest in
the life of the insured; otherwise it would be contrary to public policy as envisaged by article
713(1) for him to be a beneficiary.

When the beneficiary does not have the required insurable interest in the insured person’s
life, the life insurance contract can be likened to a wagering contract, in which case it can be
said that the beneficiary is interested in the death of the insured person rather than in the
prolongation of his life.

45
Id, at 491
46
MrTsegaw “ The determination of beneficiaries of a life insurance policy”( 2006) 1/1 Ethiopian Bar Review
35 at 51
47
G. couch couch cyclopedia of insurance law (vol.5, 2nd ed,1960.The lawyers co-operative pubco)at 78
48
Id, at 496

20 | P a g e
2.10 Nature of Assignment in general
Assignment refers to the transfer of an ownership right from one person to another. The
characteristic of a life insurance policy is its assignability or transferability by way of sale or
as collateral for securing a debt. Insurance policies possess their own characteristics; they are
regarded as property and the insured person or the beneficiary the right to assign the life
insurance policy to another person. The assignment of an insurance policy by the insured is
said to be a present transfer of rights in property.49

An assignment of an insurance policy can be of two types. The first is absolute assignment.
This refers to the complete transfer of all rights in the policy to another person either by way
of sale or gift.50

According to article 698, when the beneficiary assigns a life insurance policy for the event of
death with the written agreement of the insured Person, or when the insured person himself
assigns a pure endowment life insurance policy to another person, the assignee becomes the
new owner of the policy and can exercise his rights upon maturity of the policy. The entire
interest in the policy is therefore vested in the assignee and the assignor has no further
interest in the policy.51 In connection with the absolute assignment of a life insurance policy,
there may be instances when the insured person redeems the policy for the event of death.52

The process of redemption helps the insured person to reclaim his right over the life
insurance policy. The second type of assignment of an insurance policy is collateral
assignment, which refers to a temporary transfer of an interest on a life insurance policy to
another person.53 A person may enter into a contract of pledge and under take to deliver his
life insurance policy to his creditor as security for the performance of an obligation (debt). In
this way, a life insurance policy can be pledged in accordance with provision of articles 950-
958 of the commercial code.54 There can be a statute or policy provisions that restrict the
assignment of a life insurance policy. When legal rules do not allow assignment, then any
transaction to transfer a life insurance policy is invalid; in such cases, the specific insurance
policy may not even allow assignment in contravention of the law.
49
G couch couch cyclopedia of insurance law (vol. 16,2nd Ed. The lawyers’ co-operative pub co) at 659
50
Huebner Life and Health Insurance (13thed ,2000, person Education, inc) at 232
51
Marshal life Assurance law and Taxation (1995,) at 215
52
See art 703(1)
53
Ibid
54
Cumulative reading of art 697 of the commercial code and art 2866- of the civil code

21 | P a g e
While article 698 makes assignment of a life insurance policy a lawful transaction within
certain limitations, there may be times when policy provisions, such as that of the Ethiopian
insurance corporation requires notice for the assignment of a life insurance policy to be valid.
According to article 13 of the corporation’s life insurance policy, no assignment of the policy,
or of any interest in it, shall be binding on the corporation unless recorded by the corporation.

It is worthwhile to note the difference between the assignment of the proceeds of a life
insurance policy and assignment of the policy itself. Close reading of article 698 reveals that
it expressly envisages assignment of the policy; according to this article, the subscriber
(policy owner) is a different person from the insured person.

If can also be said that assignment of the proceeds of life insurance policy is implicitly
governed in article 708(1).This means that creditors of the beneficiary might have the right
to sum to be paid to the beneficiary. A beneficiary can therefore assign the proceeds of a life
insurance policy to the extent of the debt owed to his Creditors after the death of the insured.

2.11 General Principles of Life Insurance

If somebody suffers economic hardship and dies, at that time dependents survivors needs life
insurance. Life insurance is away to replace the loss of income that occurs when the earning
member of family dies. It is a contract between insured phases and the company that is
providing the insurance. If the insured person dies while the contract is enforce, the insurance
company pays specified sum of money to the person or persons you name as beneficiaries55.
The following are the principles of life insurance:-
1. Principle of Utmost Good faith
The commercial contracts are normally subject to the principle of “caveat emptor “i.e. let the
buyer beware. In most of these contracts each party to the contract can examine the item or
services which is the subject matter of contract. Each party believes in the statement of the
other party. So long as there is no attempt to mislead and the answers are given truthfully, the
question of avoiding the contract would not arise.56

In the insurance contract the product sold is intangible. It cannot be seen or felt. Most of the
facts relating to health, habits, personal history and family history are known to one party

55
www.nios ac-in media/documents /voc/ ns services/m2-f4
56
Commercial code article 667, 668.

22 | P a g e
only, the proposer. The insurer can know most of these facts only if the proposer decides to
disclose these facts. It is true that the under writer can have the assistance of medical report
for life insurance proposal. Sometimes, these aspects are not detected by the medical
examination e.g. A person suffering from high diabetes can manage to hide these facts from
the examining doctor.57

The history of past serious sickness, operations and injuries can be suppressed .These aspects
may affect the life expectancy of the proposer. This constitutes the material in formation.
Non-disclosure of such facts would put the insurer as well as the community of policy
holders at a disadvantage. It is for this reason that the law imposes greater duty on the parties
to an insurance contract than in case or other commercial contracts. This duty is one of at
most good faith (uberrima fides). It is the duty of the assured to make a full disclosure to the
under writer without being asked. In a contact of insurance, there is an implied condition that
each party must disclose every material fact known to him. This type of contract is called
uberrima fides i.e. contract of utmost good faith.

Utmost good faith can be defined as a positive duty to disclose accurately and fully all facts
material to the risk being proposed whether requested or not. The material fact is the
materials which influence the judgment of a prudent insurer in fixing the premium or
determining whether he will cover the risk.58 Therefore, facts regarding age, height, weight,
previous medical history, smoking/ drinking habits, operation, details of earlier insurances
and hazardous occupation must be disclosed. But, there are certain circumstances which need
not be disclosed like facts which everyone is supposed to know, of common knowledge, facts
which lessen the risk, and facts which reasonably discovered by reference to previous policies
records which are available with the insurer.
2. Principles of Warranty
Warranty in insurance is a statement or condition which is incorporated in the contract
relating to risk, which the applicant presents as true and upon which it is presumed that the
insurer relied in issuing the contract.59

57
Ibid
58
Ibid
59
Ibid

23 | P a g e
3. Principles of Insurable Interest
The insurance Act 1938 doesn’t define the insurable interest but it has been defined as
follows by Mac-Gillivray:-
“Where the assured is so situated that the happening of the event on which the
insurance money is to become payable would as a proximity cause, involve the
assured in the loss diminution of any right recognized by law or in any legal liability
there is an insurable interest in the happening of that event to the extent of the
possible loss or liability.60”

The object of insurance should be lawful for this purpose .The person proposing for insurance
must have interest in the continued life of the insured and would suffer pecuniary loss if the
insured dies. If there is no insurable interest, the contract becomes wagering (gambling)
contract. All wagering contracts are illegal and therefore null and void. Regarding to the
following, the issues of insurable interest may not create a difficulty.
1. Own Life Policy
When the insurance is on one’s own life, the “Insurance interest” presents no difficulty. A
person has insurable interest in his own life to an unlimited extent.61 When person insures his
life he obtains protection against loss to his estate; for in the event of his untimely death the
estate would not benefit by the future accumulation he hopes to make during the normal span
of life. It is not easy to compute with any degree of certainty what the future earnings of a
person would be. Hence no limit may be fixed in respect of life insurance he may affect.
2. Insurance on the Life of Spouse
As a wife is normally supported by her husband, she can validly affect insurance on her life
for adequate amount. The service and help rendered by the wife used to be thought of as the
basis of insurable interest which supports any policy which a man takes on the life of his
wife.

3. Parent and Child

Like U.K, in India also a parent is not considered to have insurable interest in the life of the
child. The same is the case with a child in respect of his parent’s life.
A Hindu is under a legal obligation to maintain his parents. The parents have a right to
maintenance subject to their being aged or infirm. Parent cannot have insurable interest in the

60
www.thomsonreuters.co.nz/macgillivray-on insurance law-13th-editio/productdetail/124682.
61
Id, at page 50.

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life of the child until the right to maintenance arises; but when a person is not able to
maintain oneself how can he be expected to have the means to insure the life of his children?
As a matter of fact in India, even today a child is a potential breadwinner for the parents in
their old age. The present affluent circumstances of a parent do not alter that situation.62

4. on the Life of other Relations

In case of other relations, insurable interest cannot be presumed from the mere existence of
their relationship. Moral obligation is not sufficient to sustain an insurable interest.63In other
case, the insurable interest must be a pecuniary interest and must be founded on aright or duty
capable of being enforced by courts of law. These of such cases of insurable interest:
1. Creditor –Debtor: A creditor has insurable interest in the life of his debtor up to the
amount of the debt. This is not as satisfactory basis for the event of death of debtor after the
debt has been repaid, the creditor would still be entitled to the policy moneys and in
opposition to gain by the death of the debtor once the loan is repaid. The better arrangement
would be for the debtor to take out a policy for the required amount and mortgage the policy
to the creditor. The creditor then cannot take benefits in excess of his dues
2. Employer –Employee: An employer has insurable interest in the life of his employee, and
the employee in the life of the employer. An employer can create insurable interest in the
lives of his employees by undertaking to provide monetary benefit to the family or estate of
the employees in the event of death.
3. Partner: - has insurable interest in the life of his co-partner to the extent of the capital to
be brought in by the latter.
4. Surety and Principal Debtor-Co-Surety: A surety has insurable interest in the life of his
co-surety to the extent of the proportion of his debt and also in the life of his principal
debtor.64

2.12 Components of Life Insurance Policy

2.12.1 Death Benefit Component
The death benefit on a life insurance policy is defined as the amount that is payable to
beneficiary when an insured person passes away. Most life insurance policies pay out the
death benefit as a lump sum. Although there are other options typically available for receipt

62
Id at page 52.
63
ibid
64
Ibid.

25 | P a g e
of the policy proceeds. Death benefit proceeds are used by the insured`s loved ones for
paying final expenses such as funeral costs and unpaid medical bills and paying other debt
such as the balance of a mortgage. And also used to fund the living expenses of an insured’s
survivors. This is especially the case when the insured was the primarily income earner in the
household and the loss of his or her income would cause significant financial hardship to
those who are left behind.65

2.12.2 Cash Value Component

Permanent life insurance offers an insurance component that pays a stated amount upon the
death of the insured, while at the same time providing a cash value or investment component
that accumulates cash value that the policy holder may withdraw or borrow against.66

2.12.3 Owner, Insured, Insurer, and Beneficiary

In addition to the financial components of life insurance policy, there are other entities that
also play a role. These are the policy owner, the insurance company and the policy
beneficiary.67 The owner of life insurance policy is the person or entity that has the rights that
are stipulated in the actual life insurance policy contract. Their rights include the right to
receive policy dividends (if applicable), the right to name beneficiary, the right to surrender
the policy for its cash value (if applicable), and even right to transfer ownership of policy.
The insured is the person whose death will cause the insurance company to pay the death
benefit proceeds to the beneficiary.

The beneficiary is a person or entity that is named in the policy that has the right to receive
the death benefit proceeds if the insured should pass away while the policy is in force. The
basic elements of life insurances are Risk coverage (I.e. Term Insurance) and savings for the
future (i.e. pure Endowment).68

2.13 The Concept of Life Insurance under Ethiopian Relevant Laws

2.13.1 Life Insurance under Ethiopian Law of Succession
According to article 827 of the civil code” monies due in performance of a contract of life
insurance, to which the deceased was party, shall form part of the inheritance where the

65
Ibid
66
Ibid
67
Ibid
68
www.money control/glossary/insurance

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deceased has not determined the beneficiary or the insurance is made to the benefit of the
heirs of the deceased without any other indication.69

From this life insurance could or could not constitute a hereditary state and it is a contract
that made between the insurer (insurance company) and the subscriber (a person who buys
the life insurance policy and makes a periodical payment of premiums to the insurer) and the
insured commits itself to pay the agreed amount of money to the beneficiary upon death of
subscriber. In this when the deceased designated heirs as beneficiary and when the deceased
silent regarding to beneficiary, life insurance can be succeeded upon hereditary.

2.13.2 Life Insurance under Ethiopian Law of Insurance

The concept of life insurance as defined under proclamation (Insurance Business
proclamation) No.746/2012 under article 2(23), life insurance means:-“ a contract where by
the insurer undertakes, against the payment of premium, to pay to the insured or to any
beneficiary specified sum on certain conditions dependent upon the life or death of the
insured.”

This definition is almost the same with definition of commercial code article 691. Insurance
of persons are when persons are insured, the insurance policy shall exited to risks arising out
of death or life or risks arising out of injury to the persons or illness. Where the term
“insurance of persons” is used in the policy, it includes the risk of bodily injury or injury
(Article 654 of commercials code) .This contract is not be considered as a contract of
compensation.70

That means what the insurer pays to the insured or the beneficiary is not compensation. As a
rule, compensation is always equal to loss, but you cannot express human value in terms of
money. You cannot put monetary value to a human life. As a result the amount insured is
freely fixed. As long as the insured afford it can buy a policy for millions. Life insurance may
be insurance for the events of life or for the event of death.71

69
Article 827 of the civil code.
70
Ethiopian law.com/blog/56-basic-catagories- of insurances-under –Ethiopian law
71
Ibid.

27 | P a g e
Where the policy is for the event of life, the insurer agrees to pay specified capital or life
interest provided the insured person is alive at a date fixed in the policy. The benefit is paid to
the insured person himself because he is alive. Insurance for the event of life is also called
endowment life insurance. Endowment life insurance is enforcing for limited life. It provides
for payment to the insured if living at the end of a specified time.72

On the other hand, the insurance who enters in to insurance for the event of death agrees to
pay, on the death of the insured person, a specified capital or life interest to those having
rights from the insured person or to the beneficiary named in the policy. If the policy is for
the event of death the insurance benefit is paid to a specified beneficiary or those having
rights from the insured. A person who buys the policy can name any person as beneficiary.
Their needs not to be a blood relationship between the subscriber and the beneficiary.
However, the spouse of the insured and the children of the insured are always considered to
be the beneficiaries even if their names do not appear in the policy.73

Article 705 of the commercial code states, “where no beneficiary has been specified or he
has revoked or is not a live, the capital to be paid by the insurer shall be paid to the estate of
the subscriber.” Where no one has been specified as a beneficiary, the benefit is traded like
any other property of the insured person. In such a case, all persons who have rights from the
subscriber may get their share; it is safe to say the law of succession applies.74

An insurance policy for the event of death may be made by a third party. However, the
insured person is married, his wife or her husband must agree. There is an interesting
question in connection with life insurance policy i.e. what if the beneficiary commits suicide?
According to article 699 of commercial code; “Notwithstanding any provision to the contrary
an insurance policy for the event of death shall be of no effect where the insured person
knowingly commits suicide. The insurer shall establish that suicide was committed
knowingly.75 The other issue is that if the beneficiary kills the insurer intentionally and if he
is convicted (meaning found guilt), the beneficiary losses his benefit.

72
Ibid
73
Article 701(2) of commercial code
74
Ibid at note 46
75
Ibid

28 | P a g e
29 | P a g e
 Chapter Three

Life Insurance and Its Successions under Ethiopian Laws

3.1 Theoretical Foundations of Life Insurance

Modern life insurance dates back to 1706, amicable society for a perpetual Assurance office,
established in 1706. It was the first life insurance company in the world.

The first life insurance policies were taken out in the early 18th century. The first company
to offer life insurance was the amicable society for perpetual Assurance office, founded in
London in 1706. In the late 19th century” accident Insurance” began to become available
.Life insurance is its modern form came to India from England in the year 1818.76

When we see the over view of information in 1960’s there was not organized information
available on life insurance. In 1960’s “The Ethiopian Life Insurance Company and Ethiopian
–American life insurance company were offering only life insurance policies. Lion insurance
was engaged in both life and non-life insurance. The remaining ten companies were
undertaking non-life (general) insurance business only.77

There were only three companies conducting life insurance business in 1792 in Ethiopia.
Analysis of the insurance business during the year’s 1967-1972 indicates that the share of
life insurance in the total gross premium income of the industry declined from 15.1% to 7.9%
in 1972 (was fluctuating in those years in between). The portfolio of life insurance products
offered and in force included endowment policies, whole life and other varieties.78

The share of life insurance in the total annual gross premiums of the Ethiopian insurance
corporation (ETC) during 1979/80 to 1993/94 fluctuated within the range of 2.8% and 7.6%.
Its average contribution during the same period was 4.5% …gross premiums from life
insurance business remained stagnant during the period 1979/80 and 1985/86. Life gross
premiums increased markedly in 1986/87 and 1987/88. Annual life insurance gross premiums
exceeded Birr 10 Million only in two occasions during the period of 1979/1980 to

76
www.licindia.in/history.htm
77
Hailu Zeleke,Insurance in Ethiopia,2007,page 55
78
Id pages 64-67

30 | P a g e
1993/94.The highest gross written premium registered during this period was Birr 11.47
million in 1987/88.79

Looking life insurance sales trends in the last 20 years after the enactment of the1994
insurance proclamation is better here. But there is no organized information compiled by the
National Bank of Ethiopia on this segment of the insurance market. However, a cursory look
into annual reports of the insurers submitted to NBE indicates, the life insurance sales of
some of the current insurers suggest it has not been growing at meaning fully significant
pace. According to a study conducted in 2006/2007, life insurance contributed 6%
constituting only 6 million dollars while general insurance premiums particularly motor
vehicles insurance contributed 99 million dollars i.e. 94% of the insurance premiums.80

Besides, not all insurers sell life insurance and other long term products. The Ethiopian
insurance corporation, Nyala insurance, Nib insurance, Africa insurance, Oromia insurance,
all do offer(based on information available on their official websites)life insurance or related
products.

3.2 Philosophical Foundations of Life Insurance

Life insurance originates in the recognition of an individual duty to be socially responsible.

Dr. Solomon .S. Huebner, the father of modern life insurance, established the concept of
human life value” as the economic and philosophical frame work of life insurance. Huebner’s
concept of the human life value is more than just a proposition that a human life has an
economic value. Conceptually, human life value involves several important concrete
elements, among them the following socioeconomic relations and characteristics.81

Adam smith noted that” every person has property in his own labor. Since that labor is
foundations of all property, it is most sacred and inviolable.” similarly, Huebner contended
that human life values greatly exceed all property values in importance. Without human life
values, there would be no property values. In United States of America, human life value may
be worth 10 times the asset value of real and tangible property, according to Huebner. From
economic perspective, Huebner viewed the family as a business, a person`s “first and most
important business.” Like any business partnership, the family partnership is legally
dissolved at the death of either partner.

79
Id, pages 80-81
80
Ermias Tizaizu, Research paper, Admass university college,2008,page 6
81
www.Banknsurance.com/editorial/articles/pdts/bim/1993-pgukisophyof life insurance.

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The protection of human life value provides the economic foundations for the education and
development of children in a family of the breadwinner disabled or dies prematurely.

3.3 Succession of Life Insurance and Its General Concept under Ethiopian Commercial
Code and Ethiopian Civil Code

A succession beneficiary clause is a provision in a life insurance policy that establishes the
procedure for revoking a current designated beneficiary and designating a success or
beneficiary instead.

Life insurance is fundamental estate planning tool. If your estate has enough liquid assets, the
payment of income taxes may not be much of a problem. But if a major portion of your estate
consists of shares of private companies or real estate, it may not be possible to satisfy your
tax bill on death without selling off the assets.82

Funding potential income taxes through the purchase of life insurance can be an effective
estate planning tool. If sufficient insurance proceeds are available and the policies are
properly structured, any income tax arising on the deemed dispositions of assets on your
death can be paid without resorting to the sales of your assets. As insurance needs are
constantly evolving, it’s important to review your coverage on regular basis. Since life
insurance can be a common property as the premium is paid from the common property of
the spouses, when one of the spouses died, it would be paid or succeeded.

Succession of life insurance is devolved upon heirs when the beneficiary is not designated
and also when hereditary designated in accordance of article 827 of civil code and by
interpretation of 701(2) of commercial code is that even if beneficiary is designated spouses
and children of the deceased would share the estate of the deceased by law. That means
whether the children and spouses are mentioned or not they become beneficiary of life
insurance according to 701(2) Ethiopian commercial code. In this case the inheritability of
life insurance can come into existence. According to the above cited provisions, both the
children and the spouses can claim to become the beneficiaries of life insurances. As the
bases of their argument either the children or the spouses can raise article 701(2) of Ethiopian
commercial code when one of them even excluded by the contract of life insurance.

82
WWW.tax planning guid.ca/tax-planning-guid/section-2 individual(succession-estate-planning)

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3.4 Experience of other Jurisdictions on Successions of Life Insurance.

In German law the sole beneficiary is given under section 330 of the civil code the right to
enforce the contract in his own name, but the insured during his life time retains unrestricted
control over the policy.83 He can revoke the nomination of the beneficiary and substitute
another; he can change the contract or surrender it, or he can assign or pledge it, wholly
without reference to the wishes of the beneficiary even though that beneficiary is wife or
child.84 From this giving unrestricted power for the insured affects the right to succeed the
deceased by spouse and children.

In Louisiana, life insurance proceeds are not community property except under certain sets of
facts. Seventy five years ago the supreme court of Louisiana made it clear that an insured
could name any beneficially he saw fit or change the beneficiary, if permitted by the
insurer.85 The proceeds of life insurance payable to the wife and children of the insured are
no part of the matrimonial community.86 Where the wife receives proceeds of a policy as
beneficiary, she does so only under the terms of the contract and not because of any marital
right.87

Under Louisiana law, different analysis is necessary where the policy is payable to the estate
of the insured. The proceeds of such a policy do form part of his estate at death, and whether
such proceeds fall under community property or form part of separate estate of the insured
depends upon whether the contract was made during the marriage or single and the marital
status of the insured at the time of his death is of no consequence. Thus, if the policy is taken
out during marriage, payable to the executors, administrators and assigns of the husband, and
the wife survives him, the proceeds fall in to the community, and the wife is entitled to one –
half.88 .

Even if the wife predeceases the insured husband, such insurance is held to fall into the
community which had existed, and the wife’s heirs are entitled to her half of the proceeds.89

83
German civil code in the version promulgated on 2 January 2002(Federal law Gazette (Bundestgsetz blaff
(page42, 2909) 2003(page 738), last amended by article 4 para.5 of the act of 1 October 2013(Federal law
Gazetta) section 330, pp.364, 367.
84
Ibid
85
Succession of Hearing, 26 la.Ann.326 (1874).
86
Tutorship of crane, 47 La, Ann. 326(1874).
87
Kelly V.Kelly,131 La.1024.60 So.671 (1913)
88
Succession of Budding, 108 La, 406, 32 So. 361(1902).
89
Succession of Le Blanc .142 La,76 So.223(1917

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And if the spouses have become divorced, proceeds of insurance taken out during marriage,
payable to the insured’s executor, are still part of the dissolved community, of which the
divorced wife may claim half. On the other hand, if the policy has been taken out before
marriage, pay able to the estate of the insured, the proceeds belong to his separate estate and
not to the community, even though he was married at the time of his death.90

As under any community property system, the premiums on life insurance policies are
almost always paid out of community funds. This source of the premiums does not in itself;
however give the surviving spouse or the community any right to the proceeds of the policy
as a death claim. The different schools of thought, that entertain totally opposed approaches
regarding the question of designating beneficiary in a life insurance policy. According to
Jauffret, the Ethiopian position is also adopted liberal position with regard to the designation
of beneficiaries of life insurance policy. In this in developed countries of modern sector of
most economies, the man is no longer the only member of a family who earns an income
because they developed a different social security schemes, nationality security for their
citizens. These reflect different levels of social and economic development. The question that
rose at this juncture in the development of the legal system is as to which approach best
serves the need of present day Ethiopia. To get a comprehensive understanding of a particular
provision of any law it is better if its historical evolution is studied.

Accordingly, in order to correctly respond to the problem arise regarding to the determination
of the beneficiary of life insurance in Ethiopia, the intention of the drafter of Ethiopian
commercial code regarding to the determination of beneficiary of life insurance and that of
French law regarding to determination of beneficiary of life insurance must be identified
since Ethiopian commercial code is highly influenced by the French legal system in particular
and that of civil law legal system in general on the area of commercial laws. In order to
achieve this goal the following one deals with the comments forwarded by professor
Jauffert’s who the drafter of Ethiopian commercial code on the part of insurance after the
death of professor Escarra who began drafting the Ethiopian commercial code.91 After
identifying the position of the drafter, the position of French law regarding to determining the
beneficiary of life insurance must be identified.

90
Succession of moseman, 38 La, Ann .219(1886)
91
Infra note at 99

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Professor Jauffert’s Comments are woefully scanty, when it comes to Art 701 of the
commercial code. He wrote the most liberal solutions for the determination of the
92
beneficiaries of the insurance in the case of death. That means according to him regarding
to article 701 supremacy must be given to the wills of the insured in determining the
beneficiary of life insurance.

Jauffret’s use the term “Liberal” to show that what the insured incorporated in his will
concerning article 701 must be respected. This line of reasoning can be supported by
reference to other countries employ the term “Liberal.” The French law of life insurance is of
particular relevance because it has had considerable influence on its Ethiopian counterpart.93

Another reason why we should seek the meaning of liberality in the French law is because it
is known to be one of the most liberal as regards the designation of a beneficiary of life
insurance in the event of death.94

From the designation of life insurance beneficiary what understood as liberal position, among
French legal scholars, is one that gives the policy-holder the least restricted freedom. Hence,
one can reasonably conclude that, when Jauffret, a French legal scholar, declared he chose
the “most liberal solution” his intention was to give the policy holder the maximum liberty in
the choice of the beneficiary of this policy.

This goal was accomplished under art 701(1).When it says the goal, the goal is that the law
provides the least restricted freedom to the insured in identifying the beneficiary of life
insurance. Article 701(1) says “An insurance policy for the event of death may be made to
the benefit of a specified beneficiary”. In doing this it provides the maximum freedom to the
insured in identifying the beneficiary of life insurance.

When we see Art 701(1) it is totally consistent with the declared goal of the drafts man. It is a
provision the drafts man intended to realize his goal of resolving the issue relating to
beneficiary designation in the most liberal fashion. The term “most liberal ‘to mean a policy
that places the least restriction on the right of the policy-holder to choose his own beneficiary.

92
The death of professor Escarra, the principal drafts man of the commercial code, occurred before the
completion of the work. Hence, professor Jauffret took over the task at later stage and was responsible for the
darting of the section of the code on insurance.
93
Supra note at 89
94
J.Heunor and G.Nord ( ed/ Life insurance law in international perspective reports from an international
colloquium ( stock holms )1969,p-29

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Turning to art 701(2), it would be contrary to the principals of legal drafting to assume that
drafts men included two contradictory provisions in the same article. In other cases art.
701(2) cannot be so interpreted as to defeat the declared objective accomplished by sub
article one.

The meaning of Article 701(2): An effort of this is the legislative policy to underlying the
Ethiopian law of life insurance as regards the designation of a beneficiary and the original
draft designed to reflect the said objective has not be altered at any time during the legislative
process. At the end, it is clear that sub-art 1 of Art 701 fully accords with the declared
legislative policy, since it gives the policy holder a free hand in determining the person to
whom the benefit should go.95 Interpreting Article 701(2) as did one of the courts to mean
that the spouse and children of the insured are at all times beneficiaries of a life insurance
policy in the event of death, even where a third party has been expressly designated as the
sole beneficiary, would contradict the basic policy underlying the whole provision and defeat
a goal attained in the preceding sub-article. For that reason alone, the said interpretation
should be rejected.

The other arguments in support of the forgoing conclusion that with its declared “
Liberality,’’ the law empowers the insured to revoke the allocation of the benefit to a
specified beneficially so long as the latter has not accepted the benefit ( Art 703 (2) of
Ethiopian commercial code. Accordingly, this provision says “The allocation of the benefit of
a policy to a specified beneficiary may not be revoked after the beneficiary has accepted to
the policy.”

If on other hand, the spouse and children are deemed to be beneficiaries, by virtue of law and
independent of the will of the insured, they would be no point in authorizing the insured to
change his mind as to his earlier allocation of the benefit once again the interpretation of
article 701 (2) which would lead to such an anomaly cannot be allowed.

Furthermore this, interpretation is worthless to the use of life insurance policy as a modern
tool for a business transaction. Because for various motives the third party may become the
beneficiary of life insurance. Today, it has become common practice in many developed
countries for a person to take out life insurance in favor of his creditor by way of
guaranteeing the performance of a certain obligation. It is impossible to restrict the right of

95
Article 701 of commercial code

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the insured to identify the third party as beneficiary of the life insurance policy and if done it
may hinder the commercial transaction. Ethiopia is not exception to this practice. That means
sometimes this practice arrived in Ethiopia and the insured can specify the third party
beneficiary. In this case when the court interprets only article 701(2) of Ethiopian commercial
code and decides in favor of the children the spouses or of the insured the third party may
interrupt and claim for his right. For example this is true in case of the thousands of people
borrow money from the mortgage bank to build homes. As a condition for obtaining a loan,
each one of them had to take out a life insurance policy designating the bank as the sole
beneficiary.

This is one of the major practical problems associated with the western legal system in that
big corporations subscribe life insurance policies for their employees (may be because the
employees can’t afford to do so by themselves) however, designating the corporation as the
beneficiary for the contract. In such case the agony of the family if the deceased becomes of
two folds –one loss of the father and two may not become beneficiary of life insurance.

The Ethiopian insurance law, as a modern piece of legislation, recognizes such use of a life
insurance policy. Article 692(2) envisages a situation where the insurer may undertake to pay
upon the death of the insured a specified capital “to those having rights from the insured
person.’’

Article 697 further classifies this point by expressly permitting the pledging of a life
insurance policy. Interpreting article 701(2) in manner that would limit the free will of the
insured would not only be contrary to the spirit of the above cited two provisions but would
also produce a ludicrous result. In the case where the mortgage Bank is the sole beneficiary,
for instance, the proceeds would have to be shared by the spouse and children of the insured
there by defeating the whole purpose of the transaction and rendering totally ineffective the
use of life insurance as pledge.

On the basis of the above arguments, the interpretation of article 701(2) to the effect that the
spouse and children of the insured should get some portion of the benefit, even where the
insured dies having designated someone else as the sole beneficiary, should be rejected as
contrary to the policy underlying the law as well as to several of its basic provision

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3.5 Succession of Life Insurance In Case Of Ethiopian Laws

3.5.1 Inheritability of Life Insurance under Ethiopian Laws

Life insurance could or could not constitute a hereditary state .That means -Monies due in
performance of a contract of life insurance, to which the deceased was a party, shall form
part of the inheritance where the deceased has not determined the beneficiary or the
insurance is made to the benefit of the heirs of the deceased without any other indication. In
other cases, they shall not form part of the inheritance.96

From this one could discern that life insurance can be inheritable only if insurance holder
(subscriber) designates no beneficiary at all or designated it in favor of all his heirs in a
generic form. In particular, because the future is uncertain subscribers may prefer to use the
generic terms like “my wife”, “my husband” or “my children”. In this case the beneficiary of
life insurance is not mentioned by name by the insured when he /she conclude the contract
with insurance company. Insurance holder pays the premiums to the insurance company but
do not identify the name of the specific person for whom the contract of life insurance is
concluded.

Only under the above two conditions that the money to be collected from the insurer upon
death of the subscriber forms part of the inheritance. If the subscriber designates her spouse
or only one of her children, or any other person, the money to be collected upon death of the
subscriber of the life shall not form part of the inheritance of the subscriber. In this case, the
money will be available only to the designated beneficiaries.

The law requires someone who alleges to have a right in the succession of the deceased to
fulfill some requirement. One is expected to have capacity to succeed. This is one of the
requirements to succeed the deceased. The capacity to succeed depends mainly on the heir
and (or legatee must survive the deceased person and the heir and /or legatee must not be
unworthy. The first condition is an objective condition and the heir and /or legatee shall lose
his right to succeed the deceased for reasons outside his volition and the second condition is
a subjective condition which occurs with a will full act of the heir and /or legatee in
accordance of articles 830 and 831 of the civil code .

96
Article 827 of the Ethiopian civil code of , 1960

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3.5.2 Point Of Contradiction of Ethiopian Relevant Laws With Regard To Appointment
of Beneficiaries of Life Insurance

A person who takes out an insurance policy on his own life in fact intends that, upon his
death, someone should benefit from the proceeds. But the question that debated among jurist
is whether societal interest should be imposed up on the policy holder, so that at least his
spouse and children are made beneficiaries by virtue of the law or whether the policy holder
should be given a total freedom in designating a beneficiary of his own choice.97 Ethiopian
courts are today divided over this same issue.98

In law of succession there are two theories of testation. These theories are:-

Absolute Power Testation Theory- this theory of succession supports the undisputed power
of the testator on his own property up to dis heritance. Regarding to this almost all United
States allow individuals to disinherit their dependents for any reason or no reason. In the
United States, the basic rule is that a parent can disinherit a child or a grandchild for any
reason or no reason. However, this general rule is subject to some limitations. For instance,
when a child is born or adopted after the making of the will, and the testator fails provide for
that child, the child may have a claim as a “pretermitted”- over looked child99.

Equity theory of testation- this theory dictates that a will should not be a mechanism of
imposing in equality among heirs. For example the English man’s unlimited freedom to cut
off his children without penny is gone in July1939, there come to an end. Accepted as
inherent part of the common law, this testamentary freedom had been as carefully protected
as the right of private property. It may be very well be asked that how such a harsh rule could
have received acceptance in countries like England and in particular all parts of the United
States. In civil law, a person who leaves surviving children never had complete freedom of
testation and unless the children merit a just disherison they always obtain some of the
parent’s succession despite contrary disposition by the will. In English by an Act,
1939(Inheritance or Family provision) which is known as Act put into force to amend the law
relating to testamentary disposition provides- that where after the commencement of this Act,
a person dies domiciled in England leaving a wife or husband, a daughter who has not been
married, or who is, by reason of some mental or physical disability, incapable of maintaining

97
Girma woldesellassie, Designation of the beneficiary of a life insurance policy in the event of death, Journal
of Ethiopian law, vol.16(1993)
98
See the cases published in this journal ( ed)
99
Joshua C.Tate, Care giving and the case for Testamentary Freedom, pp. 137-138

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herself and leaving a will, then the court on application of the mentioned dependents may
order that such provision as the court think fit and it is subject to restrictions.100

In Ethiopia, the insured person who buys a policy of insurance on his own life generally
makes it payable up on his death to his spouse and children. However, there are a number of
instances where other person such as brothers, sisters, nephews or nieces is designated as
beneficiaries. In a number of cases presented to the courts, the policy holder designated
persons other than members of the immediate family as beneficiaries of an insurance policy
in the event of death. That means the third party can be mentioned by the insured as the
beneficiary of the life insurance. But even in this situation the spouse and the children of the
deceased can claim payment from the life insurance policy upon the death the insured
because they have legal ground to claim the payment in case of life insurance policy after the
death of the insured. This legal ground for the spouse and children of the deceased is art.
701(2) of the Ethiopian commercial code.

According to articles 695(b) and 701(1), the insured person may specify any person by their
names as beneficiaries of a life insurance policy. The insured person can at the same time
designate his spouse and children as beneficiaries using generic names (i.e. by saying my
spouse or children) in the policy. The issue upon the death of the insured person is whether
the entire proceeds should be payable to those beneficiaries specified as per Art 695(b) and
701(1) Or Should the spouse and children of the insured person share in the proceeds with the
beneficiaries specified by name pursuant to article 701 (2). This legal issue has been a subject
to controversy in the high court and Supreme Court of Ethiopia(here I used simply the high
and supreme court of Ethiopia because the three cases jot down in this research were decided
during the Derg regime and the present court structure was not introduced during that time).
But for the last case included in this thesis I used the Federal high court and Federal Supreme
court. In fact, it is still unresolved and each of these courts has reached different conclusions
on the same issue which is not to be appreciated in written law legal system. Analysis of the
cases and the courts decisions is presented in the following paragraphs.

100
http://scholarship.law.conell.edu/clr/vol.25/iss3/1.

40 | P a g e
3.5.3 Decisions of the court (See From The Citation Why the researcher Used The
Term High And Supreme Court Of Ethiopia Rather Than The Federal High Court And
Federal Supreme Court for the next two courts but the last cases the courts are federal
first instance court, federal high court and supreme court both appellate and cassation):

The first Case

In a case litigated between Mrs.Tsigereda Weldselassie and the Ethiopian insurance

corporation, Mr.Teklehaimanot W/Gabriel was the insured person.101

The plaintiff, Mrs.Tsegereda Weldeselassie who was the wife of the deceased (the insured)
argued that she should be the sole beneficiary of the proceeds of the life insurance policy
pursuant to article 701(1), because she was designated as a sole beneficiary in the policy by
her deceased husband. On the other Ms, Sara TekleHaimanot W/Gabriel, the daughter,
claimed that article 701(1) does not entitle the plaintiff to be the sole beneficiary because the
subscriber’s heirs are equally entitled, as envisaged by article 701(2).

The high court held that article 701(1) does not provide that a specified beneficiary shall be
the sole beneficiary of the insurance money. It further reiterated that since the spouse and
children are made beneficiaries by virtue of article 701(2), it helps up to determine that the
law wants close relatives of a deceased person and those who are mentioned by him as
beneficiaries in the policy to be the beneficiaries of that policy. The court also tried to
interpret article 701(1) saying that it does not make it mandatory that there should always be
a specified beneficiary and, even when there is a specified beneficiary, sub-article (1)does not
clearly state that such person shall be the sole beneficially of the insurance policy. Besides,
the high court said that the phrase “notwithstanding that they are not mentioned by name’’ in
sub article 701(2) shows that the law makes the spouse and children beneficiaries. The trial
court also added that the purpose of article 701(1) is to allow the insured person to add other
beneficiaries, in addition to those who are beneficiaries by law; it does not exclude those
beneficiaries mentioned in sub –article (2) from sharing the proceeds. The high court finally
decided that the plaintiff should be entitled to the proceeds in equal proportion with the
deceased’s legal heirs (i.e. Ms Sara TekleHaimanot Welde Gabriel and others.)

101
Tsigerada Woldesellassie vs. Ethiopian Insurance Corporation (1976), civil case no.677/76, Supreme Court
of Ethiopia- the case published in Journal of Ethiopian law vol.16 (1993) on “Designation of the beneficiary of
life insurance policy in the event of death” by Girma Wolde Sellassie.

41 | P a g e
Aggrieved by the judgment of the high court, Mrs. Tsegereda weldeselassie lodged an appeal
with the Supreme Court. The Supreme Court analyzed the relevant facts and issues of the
case, and rendered its decision on the basis of an interpretation that it ascribed to articles
701,705 and 695(b). The appellate court held that “…. Cumulative reading of article 695 and
701 leads to the conclusion that, if the insured has specified the beneficiary, then the
insurance policy will be deemed to have been made to the benefit of the specified
beneficiary”.102 The court also reiterated that, if the spouse and children of the deceased were
presumed to be beneficiaries even when the beneficiary is specified in the policy, articles
705-08 would be redundant. Thus, the Supreme Court reversed the decision of the high court
and ruled that the whole amount of the insurance money should be paid to the appellant Mrs.
TsigaredaWeldeselassie, the designated beneficiary in the life insurance policy.

The second case

The second case of Mrs. Yeshimebet Fiseha V Ethiopian Insurance Corporation that was
litigated in the High court. The plaintiff (Mrs. Yeshimebet Fiseha) brought a suit against the
corporation. Since her late husband Mr.Yohannes Nega designated her as beneficiary in the
life insurance policy for event of his death, she argued that the defendant corporation should
be ordered to pay, the whole amount of the insurance money to her. She additionally based
for claim on article 701(1).

On the other hand, the defendant (the corporation) tried to argue that it could not discharge
its obligation since it had been so confused about to whom to pay to the insurance money
because both the spouse (the specified beneficiary i.e. Mrs. Yeshimebet Fiseha) and children
of the insured claimed the proceeds of the policy. The corporation based its argument of
article 701(2), which provides that the spouse and children of the insured are deemed to be
designated beneficiaries. The corporation, thus, asserted that Mrs. Yeshimebet Fiseha should
not be paid the entire insurance monies.

The High court held that the objective of article 701(2) is to make sure that the spouse and
children of the insured would not face financial problems as a result of the death of a bread
winner family member. If the entire insurance payment is made to the designated beneficiary,
the spouse and children might be destitute and there by become burden on society due to
discontinuance of income earned by the deceased. Thus, the children should be deemed to be

102
Ibid

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designated beneficiaries in order to share the insurance money, even though they are not
named in the policy. The court, therefore, decided that the insurance money should be
divided between the plaintiff Mrs. Yeshimebet Fiseha and the children.

However, Mrs. Yeshimebet Fiseha was not satisfied by the judgment of the High court and
appealed to the Supreme Court, claiming that the corporation should pay her the entire
insurance money as she was the sole designated beneficially. The court analyzed the relevant
facts and issues in the light of articles 701 and 695 of the commercial code and articles 827 of
the civil code. The reasoning of the appellate court was similar to that of the court mentioned
in the case of Mrs.Tsigereda Welde Selassie v Ethiopian Insurance Corporation.103

In its judgment, The supreme court declared that a cumulative reading of articles 695 and 701
reveals that a life insurance policy for the event of death would be deemed to have been
procured in favor of the designated beneficiary so long as the latter is named there in
nevertheless, in default of beneficiary specified by name, the spouse and children are
presumed to be designated beneficiaries.104 Hence, the Supreme Court reversed the judgment
of the high court and ruled that the entire amount of the proceeds of the life policy ought to
be paid to the appellant Mrs Yeshimebet Nega for she was the designated beneficiary.

Generally, the issue before the court was whether the said provision(701(2)) entitled the
spouse and children of the insured to benefit from the proceeds in spite of the fact that they
were not mentioned in the policy, and despite the fact that a third party was expressly
designated as the sole beneficially. Decision of the high court grants that, pursuant to the
701(1), the insured person can designate his own beneficiary, including persons other than
the spouse and children.

But, when reading this provision (701) (1) and (2) jointly, it arrived at the conclusion that
even if they are not designated by the insured, his spouse and children are at all times
presumed to be beneficiaries of any life insurance policy in the event of death. Thus
according to this court, if the insured names his father as the only beneficiary, the father will
have to share the proceeds with the spouse and children of the deceased in spite of the fact
that they are not designated. This interpretation of the law follows the school of thought that
rejects granting unlimited authority to the policy holder in determining who the beneficiary
should be. These are supported by arguments that the policy-holder, more often than not, is

103
Supra note above at 103
104
Supra note above at 99

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the sole bread winner. For this reason it is his duty to provide for the sustenance of the family
in the event of his death.

Even if there is property to be inherited in the liquidation processes commonly such a

protracted affair that it precedes might not be available for the immediate needs of the
household. That means when the law gives the insured the right to specify the beneficiary in
the life insurance policy and the beneficiary as specified the receive the whole amount of
money from life insurance policy, family of the insured who may live in immediate need is
going to be excluded from becoming parties who have the right over the money paid in the
proceeds of life insurance policy. In other case, insurance payments are supposed to be
relatively easy to obtain in the form of cash.

Another argument is the need to protect the common property. Since the proceeds of life
insurance do not form part of the insured`s estate and hence are not subject to the rules of
succession, a life insurance policy destined to benefit persons other than the spouse or
children can be used as a means of excluding substantial assets from the estate.

Designating a third party beneficiary can be particularly injurious to the spouse and children
of the insured by making them beneficiaries to life insurance by virtue of the law, even when
they are not so designated. In opinion of the said division of the high court, therefore,
Ethiopian law of life insurance in the event of death is motivated by these very concerns. A
decision of the Supreme Court is not persuaded by these arguments. Where there is a
beneficiary expressly designated by the insured in accordance to the authority vested in him
by art 701(1) of commercial code, the Supreme Court reasoned, such a beneficiary is entitled
to the entire proceeds of the policy. When interpreting art 701(2), the Supreme Court ruled
that the spouse and children of the insured would be entitled to the benefits only where no
one is expressly designated by the policy holder.

Generally, therefore, the two courts are at complete logger heads, according to high court
decision art 701(1) and (2) are complementary. That means there is great difference in giving
judgment regarding to article 701(1) and 701(2) when the courts interpret those provisions.
A third party can be designated as beneficiary, but he will have to at all time share the benefit
with the spouse and children of the insured even where these are not mentioned as
beneficiaries.

44 | P a g e
According to Supreme Court decision, however, the will of the policy holder is supreme and
as such whoever is designated by him gets all the benefits that accrue from the policy. It is
only where the policy holder dies without designating a beneficiary that his spouse and
children would be able to claim the proceeds. These different decisions by two courts, have,
if anything thrown both policies –holders and insures into total confusion, which is bounded
by the absence of the principle of stare decisis in our legal system.

The Case 3. Genet Belay v Fenet Teklu105

Summary of the Facts and Issues

The case was initiated at the Federal First Instance Court, where the succession of Ato Teklu
Nega was referred to a liquidator and the later came up with a report proposing the proceeds
of life insurance, i.e., USD166,449.97 paid by ‘Pepsi Cola International Organization’ to the
present petitioner (W/ro Genet Belay) to be part of the estate of the deceased and
partitioned between the petitioner, wife of the deceased, and the heirs. The justification
of such proposal by the liquidator appeared to be the absence of any evidence
supporting the fact that the life insurance policy was concluded for the benefit of the
petitioner. The Court has approved the proposal of the liquidator. Aggrieved by the decision
of the Federal First Instance Court, the present respondent (Fenet Teklu), child of the
deceased, lodged an appeal to the Federal High Court.

The appellant argued that the money due from the contract of life insurance shall be
partitioned among the heirs, as it forms part of the inheritance, and the petitioner that was not
designated as a beneficiary of the life insurance policy have no right for payment. In order to
verify whether the policy was made for the benefit of the present applicant, the
appellate court orders for the production of the policy. With a letter written on
22/01/2000, the employer organization of the deceased replied that the insurance policy
could not be found. Accordingly, the Federal High court argued that the present
petitioner has failed to prove, by producing the insurance policy, that she is the
designated beneficiary. Hence, it reversed the decision of the Federal First Instance Court that
entitles the petitioner to take half of the proceeds of the life insurance and decides the
proceeds of the insurance policy to form part of the inheritance and be partitioned among

105
Genet Belay vs Fenet Teklu, cassation File no.44561(Federal Supreme Court Cassation, Division, Hamle
28,2002E.C), vol.10 pp87-94as cited by Melese Wendemasgegneh in his work Designating the beneficiary of a
life insurance policy. The case provided here is a summary of facts selected based on relevance to the writing of
this research.

45 | P a g e
the heirs and descendants of the deceased. The present petitioner, discontented by the
decision of the Federal High Court, lodged an appeal to the Federal Supreme Court. The
Federal Supreme Court rejected the application of the petitioner based on Art.337 of
Civil Procedure Code. Thereafter, the petitioner filed an application to the Cassation
Division of the Federal Supreme Court on March 10, 2001 E.C, invoking that the
Federal High Court has committed a basic error of law in interpreting Art.827(1) of
the Civil Code. Moreover, the petitioner argued that the lower courts’ decisions failed to
take into account Art.701 (2) (a) of the Commercial Code. The Cassation Division
accepted her application and summoned Fenet, the respondent, through newspapers.
The respondent, however, failed to appear and the Cassation Division ordered for the hearing
in absentia. Accordingly, the Cassation Division framed an issue to determine whether the
decision of the Federal High Court and the Federal Supreme Court was based on a correct
appreciation of the relevant provisions of the law or not. Hence, it examined the case and
maintained the interpretation of the lower courts regarding the insurance policy
concluded by the deceased. That is, since the petitioner has failed to adduce adequate
evidence to the effect that the insurance policy was made for her benefit, it is
presumed that the insurance policy is made neither for the benefit of the petitioner nor to
the children of the deceased. However, the Cassation Division noted that the decision of the
Federal High Court and the Federal Supreme Court on the issue of determining the
beneficiary in case the life insurance policy is not made for specified beneficiaries
needs further consideration. The Cassation Division held that where a life insurance policy is
not made for a specified beneficiary, the claim over the payment of the money due from the
contract of the life insurance may be made based on Art.701(2) and 705 of the Commercial
Code combined with 827(1) of the Civil Code. The Cassation Division resolved the
issue by applying the three provisions together which it found as contradicting with one
another. Consequently, the Cassation Division adopted an interpretation that renders those
provisions effective in application. Hence, where a beneficiary is not designated in a life
insurance policy, the Cassation Division interpreted Art. 827(1) of the Civil Code, Arts.701
(2)(a) and 705 of the Commercial Code as stipulating that the proceeds to be paid out of the
life insurance policy shall be partitioned among the heirs and the wife of the deceased.

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 Chapter Four

Conclusion and Recommendation

4.1 Conclusion

Life insurance is the contract where by the insurer undertakes against the payment of one or
more premiums to pay to the subscriber or to the beneficiary a specified sum on certain
conditions dependent upon the death of the subscriber or third party insured. But it is not a
contract for indemnity for the concrete reason that human life is absolutely not indemnify
able or the compensation paid by the insurer does not commensurate the life of the subscriber
which is lost.

Life insurance for the event of death can be used as collateral (pledge as in article 697) to
secure a loan from a bank. Life insurance can be an important asset to have, no matter where
you are in life. If you have a family of your own, life insurance can help your family survive
financially, if they did not have your income to support them any longer. It also enjoys
favorable tax treatment unlike any other financial instrument.

Life insurance is to provide financial support for beneficiaries named in policy and
particularly to protect members of a family from the financial consequences of the death of
the bread winner.

The main purpose of life insurance policy in the event of death was almost believed that to
protect the members of the immediate family of the insured against sudden deprivation. This
is justified by economic and social conditions. The importance is that his death meant a
serious economic crisis for his dependents since the man was, more often than not, the sole
bread winner. To overcome this problem of economic crisis men took out life insurance.
When I say men it is not to exclude women from engaging in the contract of life insurance
contract and they have full right to enter into that contract especially when they are the sole
bread winner of the family.

However, when we come to modernization, things changed radically. When we take modern
sector of most economies, the man is no longer the only member of a family who earns an
income. In addition to this since many developed countries developed a different social
security schemes, death of the head of a family no longer portends extreme economic
difficulty for its members. When this change occurred, providing for the sustenance of a

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family ceased to be the primary objectives of a life insurance policy in countries and the
developing countries are not exception to this change and the primary purpose of life
insurance can be diverted with change.

In most developed countries the greater emphasis is on the free will of the policy holder. The
Ethiopian position is also adopted liberal position with regard to the designation of
beneficiaries of a life insurance policy.

The policy makers must have accepted the inevitability of a period of tension between local
conditions and the super imposed alien law. The decisions of the two courts discussed above
are in a way, reflections of the said tension. In this regard one of numerous questions judges
will have addressed is how to protect the interests of the spouse and children within the
context of law (successions of life insurance) that upholds the supremacy of the will of the
insured.

Most countries that have liberal life insurance laws, including the United States of America,
France and the former West Germany have recognized the need for such the protection if the
interests of the surviving spouse so require. On several occasions, their courts have set aside
the will of the insured, despite the fact that their laws do not expressly authorize interference
with the freedom of the policy holder in determining a beneficiary.

The most common case in many western countries is where a married man designates his
mistress as beneficiary. Courts have consistently held such designations control bonus mores
and gave the benefit to the wife, even though she was not expressly designated as beneficiary.
Thus, it appears that this is a better compromise approach to bridge the gap between those
who believe that life insurance should exclusively benefit the immediate family, and those
who stress the supremacy of the will of the insured who designates a third party as
beneficiary for perfectly legitimate reasons, it leaves room for the invalidation of the
designation when it is contrary to morality or good faith

When we see the legal issue relating to article 701(1 and 2) it is still the subject of
controversy. Accordingly, the insured person may specify by name whoever he wants to be a
beneficiary. Thus, there is no doubt that this specified beneficiary is entitled to claim the
proceeds of the life insurance policy.

The insured can, however, use generic names as the life insurance policy might have been
bought prior to marriage and before the birth of child or children. That is why the phrase

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“notwithstanding that they are not mentioned by name” in article 701(2) is used. It follows
then that the spouse and children have the right to share the proceeds of the policy with
specified beneficiaries. However, if the insured person has not used generic names (“my
spouse” or “my children”) in the life insurance policy those beneficiaries. Who are specified
by names is entitled to claim the whole amounts of the capital to be paid by the insurer. Other
individuals, however, ought to be specified by their names explicitly in the life insurance
policy

4.2 Recommendations

Life insurance is important in commercial transactions. This interaction is governed by legal

rules and insurance policy provisions. Sometimes, however, there are gaps in the law and this
gives rise to a difference in interpretations by the courts. In most developed (western liberal)
countries the greater emphasis is on the free will of the policy holder. For this purpose death
of the head of the family no longer portends extreme economic difficulty for its members.
However, when we come to Ethiopia its citizens have no any security in all circumstances.
Depending on this and the existence of contradictory provisions in Ethiopian laws which
became into force at the same time that means in 1960 (commercial code and Civil Code on
same issue) I forward my recommendations as follows.

1)For the purpose of achieving the primary purpose of life insurance which is protecting the
members of the immediate family of the insured against sudden deprivation that is justified
by social and economic conditions, it is better if the court cumulatively apply article 701(1
and 2) of commercial code that means respecting the right of the beneficiary specified by the
insured and also the members of the family of the insured who are considered as beneficiary
by law as per article 701(2) of commercial code as the high court of Ethiopia did( here the
Ethiopian high court as summarized in chapter three of this thesis -not the Federal High
court).

2) I recommend that it is better if Ethiopia follows the interpretation of the high court of
Ethiopia which dictates that the spouse and the children of the insured should become the
beneficiary even if they are not mentioned in the life insurance policy as beneficiary. In this
case the successions of life insurance would be applied. Here what must be taken into account
is the spouse and children of the insured must not face financial problems as a result of the
death of a bread winner family member. If the entire insurance payment is made to the
designated beneficiary the spouse and children might be destitute and there by become

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burden on society due to discontinuance of income earned by the deceased. Thus, the children
and spouse of the insured must become beneficiary.

3) In case there is marital relationship the mere fact that their marriage is lawful, an insurable
interest is presumed. The fact that there are reciprocal rights and duties arising out of a lawful
marriage tie is alone sufficient to support existence of both interests, regardless of the
pecuniary relationship. In addition it is known to everyone that spouses, once lawfully
married, shall live under one roof, support each other, have in principle common property etc.
they are deemed to be of one flesh. So, the spouse and the children of the insured must
become beneficiary even if they are not mentioned in the life insurance policy with the
beneficiary specified by the insured.

4) Giving freedom for the insured in case he/she enters into a contract of life insurance may
facilitate the commercial transaction especially in our modern time. For the sake of keeping
the children and spouse of the insured as beneficiary of policy of life insurance the law that
may compromise the interest of the specified beneficiary and that of beneficiary by law
(children and spouse of the insured) must be there for sake of giving liberty for the insured
and this may not hider commercial transaction and the right of the beneficiary by law cannot
be harmed. This is recommended from the angle of to the benefit of policy of life insurance
that it facilitates commercial transaction and from the angle of not restricting the right of the
insured in case he/she enters into contract of life insurance for third party for commercial
purpose.

5) For the protection of common property of spouses on life insurance, Ethiopia should make
the law of successions of life insurance under specific code to specify the protections of the
members of the immediate family of the insured against sudden deprivations. The law in
force at this time which deals with the issue of life insurance and its beneficiary written both
under Ethiopian civil code under succession part which deals with succession of life
insurance and Commercial code under law of insurance part which deals with determining
beneficiary of life insurance must not contradict each other. The legislator must give attention
to these provisions because the provisions are contradicting each other and even miss leading
the judges and the provisions make the family quarrel each other. On the same issue different
decision must not be given because we have the written law that written law must be rectified
if they are contradictory to each other.

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 References

Books and journals

1. Colin Vaux, Raoul, The law of insurance, 3rded, 19702. Ermias Tizazu, Research paper,
Admas University College, 2008

2. G Couch Couch Cyclopedia of insurance law (Vol.16, 2nded.The Lawyers co-operative

pubco)

3. G Couch Couch Cyclopedia of Insurance law (Vol.4, 2nded, 1960.The Lawyers co-
operative pubco)

4. Micheal Angels, Webster’s New world college dictionary, fourth edition

5.Fasil Alamayehu and MerhatbabTeklemedin, Law of Banking, Negotiable instruments and

Insurance, sponsored by the justice Institute, 2009 page 115.

6. Girma woldesellassie, Designation of the beneficiary of a life insurance policy in the event
of death, Journal of Ethiopian law, vol.16(1993)

7. Hailu Zeleke, Insurance in Ethiopia, 2007

8 Huebner Life & Health Insurance (13thed, 2000, Pearson Education, Inc.)

9.J.Hellnor and G.Nord(ed), Life Insurance Law in International perspective, Reports from an
International Colloquium (Stockholm) 1969

10. M Tsegaru “The determination of beneficiaries of a life insurance policy’’ (2006,

Ethiopian Bar Review)

11. R.Nader and w smith winning the Insurance Game, 1993

12.Alicia Ormaza, Differences between Life Insurance and Property & Casualty Insurance,
2015

13. Joshua C.Tate, Care giving and the case for Testamentary Freedom, pp. 137-138

Cases

14.Tsigerada Woldesellassie vs. Ethiopian Insurance Corporation (1976), civil case

no.677/76,

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Supreme Court of Ethiopia- the case published in Journal of Ethiopian law vol.16 (1993) on
“Designation of the beneficiary of life insurance policy in the event of death” by Girma
Wolde Selassie.

15.Genet Belay vs Fenet Teklu, cassation File no.44561(Federal Supreme Court Cassation,
Division, Hamle 28,2002E.C), vol.10 pp87-94as cited by Melese Wendemasgegneh in his
work Designating the beneficiary of a life insurance policy. The case provided here is a
summary of facts selected based on relevance to the writing of this research.

Laws

16. The Commercial Code of Ethiopia (1960)

17. The Civil Code of Ethiopia (1960)

18. Insurance Business Proclamation No.746/2012

Websites

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January, 2017

20. www.insurable cored. Com. the key components of insurance.

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22. https://www.all.all.state.com/toos-andresources/financial/lifeinsurance. Advantages.aspx.

23. http://www.gateway financial.biz/node/133.html, Accessed on 25 January, 2017

24. www.forbes.com/site./six ways-life-insurance-can-benefit-you/, Accessed on 10

February, 2017

25. https://www.all.state.com/tools-and-resources)financial life insurance-advantages.aspx,

Accessed on February, 2017

26. www.nios.ac-in/media/documents/voc/ns services/m2.f4, Accessed on 27 January, 2017

27. www.insurancescored.com/the-key-components-of-life-insurance)

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28. www.money control-com/glossary/insurance, Accessed on January 12, 2017

29. Ethiopian law.Com/blog/58-basic-catagories-of insurances-under Ethiopian

30. www.licindia.in/history.htm, Accessed on 11 February, 2017

31. www.bankinsurance.com/editorial/articles/pdfs/bim/1993-philosophy-of-life-insurance

32. www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/succession-estate-
planning/

33. http://scholarship.law.connel.edu/clr/vol.25/iss3/1, accessed on 10 February, 2017

34. www.tax.planning guid.ca/tax-planning guid-/section-2 individual (succession estate-

planning).

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