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Summary RSK3701 TEXTBOOK C2
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Summary of 41 pages for the course RSK3701 - Risk Financing and Short Term Insurance at Unisa (RSK3701 TEXTBOOK C2)
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LEGAL AND TAX ISSUES CHAPTER 2CHAPTER 2
LEGAL AND
TAX ISSUES
Learning Outcomes
When you have completed this chapter you will be able to
explain the concept of contractual capacity and list the types of
persons who have no, or a limited, contractual capacity;
explain the special adaptations to the common law principle of
contractual capacity brought about by the Long Term Insurance
Act;
explain when insurable interest must be present;
provide examples of insurable interest applicable to life insurance
policies;
explain the difference between caveat emptor and uberrima fides;
discuss the implications of the reasonable man test as applicable
to life insurance policies;
explain how a lost policy document can be replaced;
briefly describe the legislative protection afforded to life insurance
policies;
explain, in general terms, the miscellaneous restrictions and
prohibitions applicable to life insurance policies and their
marketing, including maximum commission scales;
discuss how the cause of the death of a life insured may affect the
payment of a claim;
explain, in some detail, the restrictions applicable when a new
policy is issued;
describe a cession and its applications on a life insurance policy;
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,LEGAL AND TAX ISSUES CHAPTER 2
explain the difference between an absolute cession and a security
cession;
explain the rights that a beneficiary appointed to a life insurance
policy has;
discuss, in some detail, the unique position of a beneficiary
nominated on a retirement annuity and the rights that the
beneficiary has;
explain the impact that the Income Tax Act has on the employer
and the employee if the employer owns a life insurance policy on
the life of the employee;
list and provide a general description of other taxation issues that
apply to a life insurer.
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,LEGAL AND TAX ISSUES CHAPTER 2
2.1 CONTRACTUAL CAPACITY
To have a contract one person must make an offer that can be accepted or declined by the
other person. Only once an offer has been accepted, is there a legal contract between the
two people. No person is able to make an offer, or accept the basis of a contract, unless they
have the ability to enter into a contract. We call this contractual capacity. While most people
have the ability to enter into a contract, there are some who have only a limited contractual
capacity and some who have no right or ability to enter into a contract at all.
2.1.1 PERSONS WHO HAVE NO CONTRACTUAL CAPACITY
Insanity
A person who has been declared to be insane is said to be unpredictable and therefore
incapable of being held responsible for his actions.
Persons who are intoxicated
The common view is that any contract entered into by a person under the influence of either
alcohol or drugs is invalid and will be declared invalid from the beginning.
Minor children under age 7
In the past, children under the age of 21 were said to be minors but with the passing of the
Children’s Act in 2007, the age of majority has been reduced to 18. There are two levels of
contractual capacity applicable to minor children. Common law says that any child under the
age of 7 is incapable of entering into any contract and so will need the help of a guardian for
any contract, even to open a savings account.
2.1.2 PERSONS WITH LIMITED CONTRACTUAL CAPACITY
Minor children ages 7 to 18
Common law says that any child over the age of 7 but still a minor (under the age of 18) has
only a limited contractual capacity. Such a child will still need the assistance of a guardian for
the signing of a contract but not for the opening of a savings account.
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, LEGAL AND TAX ISSUES CHAPTER 2
2.2 INSURABLE INTEREST
There is a long history behind the need to make sure that there is an insurable interest when
taking out an insurance policy. This need is possibly the single most important difference
between an insurance policy and a gamble.
For an insurable interest to be present, the person taking out the insurance policy must be
able to provide tangible evidence, if called upon to do so, that he will suffer a financial loss in
the event of the insured event happening. This evidence must be provided at the inception of
a life policy.
The need to show insurable interest can be traced back as far as the English Life Insurance
Act of 1774, which was passed to prevent a “mischievous kind of gaming”. In essence the
Act said that no insurance contract could to be taken out by any person, both natural or
juristic, on the life of another person unless there is an insurable interest. It also made sure
that no insurance contract could be taken out by way of gaming or wagering. Any insurance
contract that broke these rules, was declared to be “null and void” or not legal.
The Gaming Act of 1845, while not making any specific mention of insurance or insurable
interest, said that all contracts or agreements, whether verbal or in writing, would be null and
void if they were gaming or wagering. This was, in fact, the first time that all contracts made
by way of gaming or wagering were declared void and unenforceable by law, whatever their
form or subject matter. The need for an insurable interest was therefore established in
English law.
An insurable interest is no less important in South Africa than elsewhere. The Cape Province
decided, in 1902, to use almost the exact wording from the Gaming Act of 1845 in the
“Betting Houses, Gaming Houses and Brothels Suppression Act, 36 of 1902".
The fact that wagers or bets, in the other provinces cannot be enforced is based on Roman-
Dutch Law. The South African courts have accepted the view of the Roman-Dutch writers
from the end of the eighteenth century, that all gaming or wagering contracts are
unenforceable. It therefore means that proof of insurable interest is needed throughout South
Africa.
For Information Only (not to be examined)
While no mention of insurable interest as such appears in the South African
Long Term Insurance Act of 1998, the legislation of our neighbour,
Botswana, does. Whilst there is no actual definition of insurable interest, the
Botswanan legislation applicable to the insurance Industry (which comprises
chapter 46 : 01 of the legal code) states, in Section 66:
(a) Subject to the provisions of this Act, no policy of insurance shall be
issued on the life or lives of any person or persons, or on any other
event or events whatsoever, wherein the person or persons for whose
use, benefit, or on whose account such policy or policies shall be made,
shall have no insurable interest.
(b) An insurable interest shall be deemed to be had by -
a parent of a minor or the guardian of a minor but only to the
extent as provided by Section 77 (a maximum of P2 000 on a
minor who has not yet attained 16 years of age);
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