Faraid in Life Insurance / Takaful

Have you ever buy Life Insurance Policy ?

The Insurance agents may present you 4 forms you need to fill up. One of them, and the most important one is the proposal Form, because it forms the Offer part in the Insurance Contract. On the second page of the form, you can find a space where you are required to fill in the name of the beneficiary of the Life Insurance.

For non-muslim, that written beneficiary will be the Executor and Beneficiary of the Life Insurance money. In simple words, the person named will be the one who goes to court to administer the money (executor) and can spend the money (beneficiary), but if the person is a minor (below 18), he will just be the beneficiary, another executor will manage on behalf of the kid.

However, this doesn’t apply to Muslim. You may usually hear from the Insurance agents that you do not need to write the name of beneficiary because, according to the agents, the life insurance money of muslim is governed by Faraid law.

Well, this is not that accurate, specifically.

Nomination

Nomination is a process by which a person who has taken up insurance policies or has saved money in any institution, names certain persons to benefit from such insurance policies or savings in the event of his death.

In Malaysia, there are 2 types of nomination namely a nomination which has the effect of creating trust in favour of nominee :

• nomination of a life insurance policy made under section 23 of the Civil Law Act 1956
• a statutory nomination as in the case of nomination made under the Employees Provident Fund (EPF) Act 1991 or the Co-Operative Societies Act 1993.

Muslim scholars in Malaysia differ on the effect of nominations by Muslims.

The fatwas in Pahang, Selangor, Negeri Sembilan and Kedah state that the property governed by nomination is not testamentary property and shall be divided by way of faraid. The fatwas in Perak and Kelantan mention that the nomination of the EPF is to be regarded as gifts that will take effect upon death.
National Council of Religious Affairs issued a fatwa (ruling) that nominees of the funds in EPF, Post Office Savings Bank, Insurance and Co-operative Societies can receive the money of the testator and it has to be divided among the persons entitled to them under the Islamic law of inheritance (faraid).

As I elaborated in preceeding articles, although Muslim can’t specifically allocate the money on a will, but will is very necessary, because, on a will, Muslim can nominate Executor of the Insurance money. Money will still be then distributed as per faraid or mawarith (Refer Section 167 Insurance Act 1996), but at least the tedious process in appointing administrator can be skipped.

I repeat again, if you are muslim, if you die, the proceed from life insurance and personal accident will be distributed to specific heir at specific portion set by Faraid law. Same goes to Kumpulan Wang Simpanan Pekerja (KWSP) aka Employee Provident Fund (EPF). Yes, there is this “Penama” or “Nomination” rule, but this is just for appointing Executor (to skip the said tedious process). Nominated nominee (penama) is the Executor who will go to court and administer the Life Insurance/EPF money.

Why there is no space/column for Executor on KWSP form or Life Insurance Form ?

It is deemed that the beneficiary is the executor. Yes, for non-muslim, the nominee named will be the Executor cum Beneficiary, but for muslims, there is this implied rules as well as expressed provision in Insurance Act 1996, that Faraid distribution rules prevail.
Therefore, although the nominee / beneficiary space is on the form, for muslim, it is deemed that we understand, when Muslim fill the name, the nominated person will just become the Executor (administrator) of the money, but final recipients (beneficiaries) will be divided according to Faraid / mawarith. It is too troublesome to make seperate forms between Muslim and non-muslim.

Section 166 Insurance Act 1996

Refer to above provision, basically, the life insurance proceed will be free from creditors. Let say, Trafalgar Law has money in bank of RM100,000 and debt of RM20,000, while at the same time buy Term Life insurance. Once he died, he will get the insurance proceed of RM50,000. The money in the bank of RM100,000 will become an estate and is subject to creditor RM20,000. So, the money in the bank become less RM20,000, to RM80,000. The debt of RM20,000 cannot be deducted from the RM50,000 insurance proceed. It is because, basically, according to Section 166, insurance proceed is not part of estate and free from debt.

Unfortunately, Section 166 do not apply to muslim. Once a muslim die, his insurance money will become part of estate which is subject to faraid, where it is not free from debt.

What is Happening ?

Let us look into the life insurance industry, for example Family Takaful in Malaysia. As it is generally practised in the industry, for the Family takaful, there are 2 accounts, namely the Participant Account and the Special Participant Account.

The premium paid by the participant is paid into both accounts based on a ratio agreed by the takaful operator and the participant. The Participant Account is considered to be the deposit account of the participant whereas the Special Participant Account is for the sole purpose of making donation.

When a participant dies, there is therefore no question regarding the inheritability of the money in the Participant Account as it is part of the deceased‟s estate. However, with regard to the money payable by the takaful operator taken from the Special Participant Account for the death benefit is still questionable.

When a participant of an Islamic insurance policy dies, the participant‟s legal heirs inherit the money paid by the takaful operator. In other words, the payment of the money by the takaful operator to the nominee appointed by the deceased participant is subsequently distributed among the participant‟s legal heirs in accordance with the faraid law.

This takes place even though no Islamic legal ruling or fatwā issued by any fatwā council in Malaysia either at national or state level regarding the position of the money payable as compensation by the takaful operator on the occurrence of the death of a participant.

Section 65(1) of the Malaysian Takaful Act, 1984 stipulates that the payment of takaful benefits is made to the proper claimant. Section 65(4) explains that the “proper claimant‟ is a person who claims to be entitled to the sum in question as executor of the deceased or who claims to be entitled to that sum under the law.

Type of Ownership

In Islam, there are 2 types of ownership; Absolute ownership and non-absolute ownership.

Absolute ownership is where the property exclusively and absolutely belongs to the owner and is not subject to limitations of time. The owner has the absolute right to deal with the property and no one else has any share in it. The owner has exclusive power to dispose of the property as he wishes.

There are usually 4 occasions for absolute ownership :

a) The contract of exchange such as trading and leasing contracts, and unilateral contracts such as wasiah, hibah and wakaf
b) The replacement, or khalafiyyah, i.e. inheritance, the payment of diyyah and compensation
c) The control over permissible things such as fish in the sea and birds in the sky
d) The growth and the production of things owned such as chicken‟s eggs, cow‟s milk, etc.

It could be argued that without the participation of the policyholder, the takaful operator would never pay the money. The effort of the participant by joining the policy and paying the monthly premium suffices to constitute the proceeds as the person’s asset.

It is the contract entered into by the policyholder for family takaful, which generates the benefits. This contention is based on the fact that one’s effort becomes a justification for ownership. As a result, the money is divisible among the heirs of the policyholder according to the law of faraid.

If non-Muslim can freely give life insurance money to the one nominated beneficiary, why can Muslim not do the same by assuming the money as Hibah / Gift rather than Estate (Pusaka)

It is explained before that Family Takaful proceed is part of one’s asset during his lifetime, hence it should form part of deceased’s estate upon his death. But the takaful process is not really like investment. It is an investment because the participant contribute premium / tabaru’ for takaful business, but it is only half of the story. Takaful / insurance buys protection to transfer risk to takaful operator / insurance companies.

They do not for sole purpose of creating wealth in the insured’s ownership, but rather they create an obligation to ease the burden suffered due to the losses of fellow participants. So, even though it is the deceased‟s effort, the money is more appropriately to be regarded as an obligation upon the takaful tabarru fund to pay on behalf of other participant as financial assistance to the insured’s family in case of death.

In order to understand what whose ownership of this takaful / insurance money, we must look at the basic, the main purpose of akaful / Insurance fund. It is to provide financial assistance to the participant’s or insured‟s family. If the payment is payable strictly only to the heirs of the participants or insured, it implies that it is the property of the deceased.

However, it is not only for the deceased’s heir, the takaful / insurance money is also paid for other participants’ heirs. Thus, by subjecting the takaful / insurance proceed to Faraid law, it is just like assuming the ttakaful fund is under absolute ownership of this one participant and his heir, although actually thousands other participants also possess the right over the takaful fund.

This is very wrong.
The Shariah Advisory Council of Bank Negara in its 34 meeting held on 21
st April 2003 resolved:

1. Takaful Benefit can be used for hibah since it is the right of the participants. Therefore the participants should be allowed to exercise their rights according to their choice as long as it does not contradict with Shariah.

2. The status of hibah in takaful plan does not change into will (wasiah) since this type of hibah is a conditional hibah, in which the hibah is an ofer to the recipient of hibah for only a specified period. In the context of takaful, the takaful benefit is both associated with the death of the participant as well as maturity of the certificate. If the participant remains alive on maturity, the takaful benefit is owned by the participant but of he dies within such period, then hibah shall be executed.

3. A participant has the right to revoke the hibah before the maturity date because conditional hibah is only deemed to be completed after delivery is made

4. Participant has the right to revoke the hibah to one party and transfer it to other parties or terminate the takaful participation if the recipient of hibah dies before maturity;

5. The takaful denomination form has to be standardized and must stipulate clearly the status of the nominee either as a benefeciary or an executor or a trustee. Any matter concerning distribution of takaful benefit must be based on the contract. Participants should be clearly explained on the implication of every contract being executed.

How To Apply Hibah in Life Insurance / Takaful Keluarga 

• Life insurance is only when one dies. So, it doesn’t happen yet. How are we supposed to give away something that doesn’t exist yet ?

• If it is a hibah, can the policy holder retract the hibah because he/she takes the policy for his/her own benefit upon maturity?

• In a valid hibah, the ownership is transferred to the recipient. What if the recipient dies? It becomes his/her estate. Can the recipient be replaced?

• If a husband is paying a policy for his wife, can he be the recipient of the benefit or he can only be a trustee/executor and takaful benefit should be treated as her estate which shall be distributed according to rules of mawarith/faraid?

• Hibah which is tied up with death is a will (wasiat). It is not allowed to make wasiat to inheritor (waris). Another issue is that it may not serve the purpose of taking protection to a particular recipient.

• You see rules like Section 166 and 167 of Insurance Act 1996 and others, this conflicts hibah and may not recognize it as gift.

Solutions

There are several ways on how to go about it legally.

• Absolute Assignment or Irrevocable Trust

Hibah is a real hibah where the policy holder will not recall the hibah and the ownership of policy is regarded to have been transferred to the beneficiary. The hibah includes whatever proceeds in the policy whether it is the policy holder personal saving or the donation account.
There will be no issue of recalling the hibah or replacement of the assignee by the policy holder in the case of death of the assignee. The assignee however can reassign the policy to other party.

• Proposed Beneficiary

The policyholder only proposes the beneficiary to the takaful fund. It is the takaful operator on behalf of takaful who is giving hibah the takaful death benefit to the beneficiary. However there is another form for the participant‟s personal account where the nominee is regarded as the wasi or executor.