In­sights

Text K. Karunamoor­thy | B.Sc (U.Mal), LLB (Hons) (Lond), CLP, AMII, ACII (Lond), CFP, FChFP, Shariah RFP Ad­vo­cate & So­lic­i­tor (non-prac­tic­ing), Con­sul­tant Trainer | Fi­nan­cial Plan­ning As­so­ci­a­tion of Malaysia (FPAM)

Insurance - - CONTENTS -

FSA & IFSA - Im­pact on Death Claims

THE FI­NAN­CIAL SER­VICES ACT 2013 (FSA) AND THE IS­LAMIC FI­NAN­CIAL SER­VICES ACT 2013 (IFSA), BOTH OF WHICH HAVE MADE A SIG­NIF­I­CANT IM­PACT ON THE IN­SUR­ANCE AND TAKA­FUL IN­DUS­TRY, CAME INTO EF­FECT ON 30 JUNE 2013. AS IS COM­MON KNOWL­EDGE BY NOW, THE FSA RE­PEALED FOUR LEG­IS­LA­TIONS. AMONGST THE MOST IM­POR­TANCE OF THIS WAS THE IN­SUR­ANCE ACT OF 1996 (IA 1996). SIM­I­LARLY, THE IFSA RE­PEALED THE TAKA­FUL ACT 1984.

These two leg­is­la­tions have been de­scribed as mir­ror im­ages of each other be­cause of the sim­i­lar pro­vi­sions of law con­tained therein. How­ever there is one sig­nif­i­cant dif­fer­ence: the IFSA pro­vides for leg­is­la­tion to be com­pli­ant where rel­e­vant, to Is­lamic law and Shariah prin­ci­ples. These statu­tory pro­vi­sions and rules are of course, par­tic­u­larly sig­nif­i­cant to the Taka­ful in­dus­try. The op­er­a­tional as­pects of the law deal­ing with in­sur­ance pol­icy con­tracts and Taka­ful cer­tifi­cates can be found in Sched­ules 8, 9 and 10 in both the re­spec­tive Acts. Although the prin­ci­ples of many of the pro­vi­sions in these sched­ules have been re­tained from the pre­vi­ous leg­is­la­tions, there are nev­er­the­less sig­nif­i­cant changes in some im­por­tant ar­eas of the law. This ar­ti­cle seeks to dis­cuss those pro­vi­sions that par­tic­u­larly re­late to the pay­ment of death claims in in­sur­ance poli­cies and Taka­ful con­tracts. To have an easy un­der­stand­ing, the pro­vi­sions of the FSA on this topic will be dis­cussed first, fol­lowed in the sec­ond part by that of the IFSA.

FSA 2013

The rules for pay­ment of death claims for life and per­sonal ac­ci­dent in­sur­ance poli­cies un­der the FSA, where the pol­icy owner is also the in­sured life and has named a nom­i­nee, is gen­er­ally the same.

Thus, if a claim is deemed valid, it is manda­tory for the in­surer to pay the claim pro­ceeds to a named nom­i­nee. The sig­nif­i­cant change im­posed by the FSA is seen in “trust poli­cies”. A trust pol­icy is one whereby a nonMus­lim pol­icy owner takes up an in­sur­ance pol­icy on his own life and names ei­ther the spouse, chil­dren or par­ents as nom­i­nees. The ben­e­fit of such a trust is that the death claim pro­ceeds do not form part of the es­tate of the de­ceased and are thereby not sub­ject to the claims of cred­i­tors. Whereas pre­vi­ously the law was silent as to who can be ap­pointed as a trustee, the FSA now di­rects that the pol­icy owner can­not name him­self as a trustee or be deemed as one. The ap­point­ment of trustees in trust poli­cies has al­ways been op­tional. The role of trustees in in­sur­ance trust poli­cies be­ing (dur­ing the life­time of the pol­icy owner), to give con­sent to con­trac­tual changes when­ever ap­plied by the pol­icy owner to the in­surer. Prior to the FSA, in­sur­ers adopted one of two prac­tices when no trustee was ap­pointed in the pol­icy and when con­sent was re­quired. Some in­sur­ers deemed the named nom­i­nee in the pol­icy as the trustee (“pre­sumed trustee”) while oth­ers con­sid­ered the pol­icy owner as the trustee (“de­fault trustee”). The Act now only recog­nises the con­cept of “pre­sumed trustees”. This means that in the ab­sence of a trustee be­ing (ex­pressly) ap­pointed by the pol­icy owner, the con­sent of such named nom­i­nees are re­quired when the pol­icy owner ap­plies to make con­trac­tual changes to the in­surer. Upon the death of the pol­icy owner how­ever, the law re­mains the same in that the claim pro­ceeds are made to the ap­pointed trustee or in the ab­sence of one, to the com­pe­tent nom­i­nees. Other no­table dif­fer­ences in­tro­duced by the FSA are as fol­lows:

i) If there is no nom­i­nee named in the pol­icy or it is deemed that there is no nom­i­nee named in the pol­icy con­tract. As a gen­eral rule, the in­surer will re­quest for a grant of rep­re­sen­ta­tion i.e. pro­bate, letters of ad­min­is­tra­tion, or a dis­tri­bu­tion or­der by the land of­fice or Public Trustee Ber­had (Amanah Raya Ber­had). The in­surer is how­ever, given a dis­cre­tion to make pay­ments di­rectly to the ben­e­fi­cia­ries of the es­tate ac­cord­ing to their ben­e­fi­cial rights as al­lowed by the law. This dis­tri­bu­tion process will fol­low the rules as pro­vided in the Dis­tri­bu­tion Act 1958 (as amended by the 1997 Act), the In­tes­tate Suc­ces­sion Or­di­nance 1960 (Sabah) or the Faraid rules for Mus­lims. It is strongly be­lieved that in­sur­ers will not un­der­take the “cum­ber­some process” and re­spon­si­bil­ity to de­ter­mine the right­ful ben­e­fi­cia­ries and pay out the claim ac­cord­ingly. Pre­vi­ously, un­der these cir­cum­stances, the IA 1996 per­mit­ted the in­surer to pay to one or more in­di­vid­u­als and placed the bur­den and re­spon­si­bil­ity on them to dis­trib­ute the mon­eys to the right­ful ben­e­fi­cia­ries. In mak­ing pay­ments to such in­di­vid­u­als, the in­surer was deemed to have re­ceived a proper dis­charge of their re­spon­si­bil­ity.

ii) In­ter­est on late pay­ments. In­sur­ers are re­quired by the law to pay in­ter­est for late pay­ments of death claims, for poli­cies which were on the life of the de­ceased pol­icy owner. A pay­ment is

It is strongly be­lieved that in­sur­ers will not un­der­take the “cum­ber­some process” and re­spon­si­bil­ity to de­ter­mine the right­ful ben­e­fi­cia­ries and pay out

the claim ac­cord­ingly

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