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)
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 AS IS COMMON KNOWLEDGE BY NOW, THE FSA REPEALED FOUR LEGISLATIONS.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 SIMILARLY, THE IFSA REPEALED THE TAKAFUL ACT 1984.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.
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