Tabarru Contract

As a practical religion, Islam has a solution for the implementation of insurance system that is in line with the principle of Islamic syariah. The “Tabarru’” contract was introduced as the basis in a takaful system where it is considered more practical and safe in managing insurance systems, in which the original intention was benevolent.

 

The debate being presented in this column is related to the concept of “Tabarru’” and the reason it is considered a safe contract from an Islamic point of view, especially in handling insurance transactions and activities.

 

“Tabarru’” is a form of voluntary donation from a particular party without soliciting any reciprocation, or exchange, from the other party. It is categorised as a unilateral contract whereby it is sufficient that one party declares their handout without any exchange.

“Tabarru’” is considered a symbol of piety, it is among the most encouraged practice in Islam. Apart from the obligatory almsgiving known as zakat, voluntary donations are very highly regarded in Islam as the spirit of mutual assistance and compassion are encouraged,

Islam also places alms at its utmost position for it is the basis of a harmonious society.
In takaful, each individual who participates in any of its products, be it family, or general, will set aside a part or the whole contribution in one fund. It is then named as the Risk Fund, which contains the collective donations of the participants.

The fund acts as a source of assistance for participants that suffer a bout of misfortune.
“Tabarru’”, the way in which it is applied in takaful, has eliminated any elements of “deceptive uncertainty”, “riba”, and gambling, where these features have made conventional insurance forbidden in Islam.

This is due to “Tabarru’” being categorised as a one-sided contract that does not require any exchange or reciprocation. This is unlike any other exchange contract, especially sale and purchase ones where an exchange is decided between two parties in their respective contracts.
In takaful, it is sufficient for any person extending a donation to present them to related parties, and their contracts will be considered fulfilled.

For an exchange contract, namely sale and purchase, the contract is deemed complete once the purchaser submits the money (the item’s price) and the seller surrenders the agreed item. If not, the contract will be considered as invalid.

Through the implementation of Tabarru’, tied in with the principles of takaful (Mutual Assistance), an environment of mutual assistance will be established.

For a simple analogy, consider that Participant A extended a donation for the express purpose of helping Participant B, while Participant B also donated to help Participant A, and this situation of mutual assistance is what deemed as “takaful” where participants endeavour to help each other and not through a company as what transpired in a conventional insurance system.

According to the principle of “Tabarru’”, each donation cannot be retracted. Even if
the participant cancels his participation in the takaful, the portion invested in the Risk Fund will not be returned. However, they can retrieve the balance in their individual fund.

Insurance Benefits Paid in 2013

 

 
The life insurance industry in 2013  provided a higher insurance protection to the public in aggregate, with 3.7 per cent higher claims amount, 14.2 per cent higher payout in maturity and cash surrender values and 6.7 per cent higher insurance coverage.

According to statistics from the Life Insurance Association of Malaysia (LIAM), claims paid in 2013 amounted to RM6.9 billion in various types of claims including death, disability, medical and cash bonuses, 3.7 per cent higher than the corresponding amount of RM6.7 billion a year earlier.

In addition, RM8.6 billion was paid in maturity amount and cash surrender values in 2013, 14.2 per cent higher than the corresponding figure of RM7.5 billion in 2012. The increase was mainly due to fluctuation in maturity payment which was dependent on the term of the policies.

“The life insurance industry in Malaysia remained stable with a small negative growth of 0.2 per cent in 2013, as measured by new business total premium (single premium plus annualised premium).

“The new business total premium in 2013 was RM8.19 billion, as compared to RM8.20 billion in 2012,” LIAM’s Vincent Kwo highlighted.

“Proactive measures should be taken by the insurers and the policy makers to increase insurance awareness and to encourage insurance purchase among the Malaysian population to reduce protection gap.

‘The result of our study are expected to spur the insurance industry to move forward in achieving the targeted penetration rate of 75 per cent by 2020 under the Economic Transformation Plan.”

As the government looks to enhance products by introducing regulatory measures such as the Financial Services Act 2013 and the Islamic Financial Services Act 2013 – both of which come into force this year – the times are definitely interesting for insurers.

The General Insurance Association of Malaysia (PIAM) believes market conditions will evolve to reflect broader-based competition and a principle-based regulatory regime which modernises the laws that govern the conduct and supervision of financial institutions.

“With the development of a comprehensive regulatory and supervisory framework for the insurance industry and a more competitive insurance market, another important structural adjustment that the regulator is looking at is the review of the existing costs controls that are applied to life and general insurers,” noted PIAM.

Its chairman Chua Seck Guan said: “It is important for insurers to challenge their mind set, consider the outlook for the global economy and make a commitment to develop further as the industry plays a robust role in Malaysia’s financial system, offering a wide spectrum of general and life insurance products to cater to a more knowledgeable and financially aware society.”

The industry is directing its efforts to ensuring a firm foundation for orderly transition into this new and challenging environment.

Towards this end, Malaysian laws will place insurance companies on a platform readied by Bank Negara Malaysia for advancing forward as sound, responsible and responsive insurance companies.

Claims - Life Insurance

Life Insurance does not offer any immediate gratification. It is sold on the basis of promises made by insurers for events that may occur in the future. The policy document is a contract between the insurer and the insured, that promises payment in case certain conditions are fulfilled.

It is the duty of the agent to facilitate the policyholder’s family in completion of claim requirements at the time of the event. Life Insurance above all is a contract of trust where policyholder should facilitate correct decision-making by providing all the relevant information.

Insurance is the business of covering the probability of an individual getting sick or dying, higher the risk higher the premium. A person with high risk paying low premium by withholding critical information is liable for penalty.

Here are some guidelines a policyholder must follow:

Correct information: While filling up your proposal form and while signing a contract, you must furnish all information in good faith since you will be held accountable for making a wrong declaration. For example, if you are suffering from hypertension, mention this fact at the time of buying the insurance policy. If you conceal this fact, in case of untimely demise your nominee’s claim may be repudiated on the basis of non-disclosure of material facts.

Nomination: The insurance company is discharged of its liability once it pays the sum assured to your nominee(s) registered under a process established by the Insurance Act, 1938. Since a claim without a nominee cannot be settled, all insurers ask for evidence that the claimant is the rightful person.

In case life assured has nominated somebody to get the benefits at the time of death, claim benefits are disbursed in favour of that nominee unless there is a Will provided to us (that supersedes the nomination) or there is a legal dispute. In case there is no nominee, benefits are disbursed to the Class 1 legal heirs and/or the designated heirs as per the Will or Succession documents. In case of maturity claim, amount is disbursed to the policyholder

Documentation: Submit all documents to make a claim. The documents under any life insurance death claim fall under the following broad categories:

n Documents related to the policy.

n Documents to prove that the occurrence of the event does not fall under exclusions mentioned in the policy contract.

n Documents to prove the identity and that the claimant is the rightful nominee.

An insurance firm cannot settle a claim until all documents are in place. In case original documents cannot be produced, there is a process to get the documents certified. To avail maturity claims conveniently, the policyholders should continue to pay their premiums on time. During the course of their policy tenure, in case the contact details or the address changes, they should get it updated in the records of their company. While the insurer will communicate when the policy would be due for its maturity, the policyholders should also proactively track their maturity timelines and get in touch with the company prior to maturity, to close the documentation requirements, for convenient disbursement of the claims.

One should also keep in mind a few do’s and don’ts for speedy and smooth settlement. Submit all the required claim documents together. Details of documents for claims settlement as well as various claims forms are available with the policy pack, with agent advisor, insurer’s offices and on insurers’ websites.

Common issues that can lead to delay are nondisclosure of facts, nomination not done at application stage, dispute between claimant and other legal heirs, unconfirmed cause of death and murder cases. In case of maturity claims the delays can arise on account of incomplete documentation or the policyholder not being reachable or not approaching the insurance company for the maturity claim amount.

Takaful In Malaysia

The Malaysian Takaful Association forecast takaful contributions to increase to US$3.02 billion this year from US$2.44 billion last year, on the back of market penetration rate of 14 per cent, said chairman Zainudin Ishak.

He said to meet the target, industry players needed to come out with more regular premium products such as protection, child education, retirement and medical.

"With only 30-year experience, coupled with 10 per cent market share or maybe less than that, there is an upside for us to offer the regular premium products instead of single premium, which has 50 per cent market share for takaful sector.

"I think if we are able to fix this then there will be an increase in market penetration as well as meeting Bank Negara Malaysia's target of 75 per cent by 2020," he told media briefing at the Takaful Rendezvous 2014 here on Wednesday.

Single premium is a plan in which a lump sum of cash is paid up front to guarantee payment to beneficiaries while the regular premium requires the holder to pay on a monthly basis.

 Zainudin said he expected more mergers and acquisitions (M&As) due to the rapid growth in the sector domestically amid increasing global demand.  "I supposed the period of the M&As probably should be very fertile with the introduction of Islamic Finance Services Act 2013 (IFSA) by the central bank, whereby the current players need to split their licences," he said.

It was reported that over the last two years, M&As in the insurance sector have mainly involved conventional insurers and analysts foresee consolidation in the takaful sector in view of the Financial Services Act (FSA) and the IFSA.

Under the FSA and IFSA, which came into force on July 1 last year, composite insurers and takaful players will, among others, be required to split their life and general insurance businesses under separate licences.

Under these Acts, insurers and takaful players have been given until 2018 to comply with the requirement.

Bankrupt, Life Insurance & EPF

Bankrupt
Any person who cannot pay a debt of RM30,000 can be declared a bankrupt under Bankruptcy Act 1967. Bankruptcy is a legal procedure involving an individual or business, who is unable to repay the outstanding debts.

When a person is declared Bankruptcy, the Directory-General of Insolvency will handle and take possession of all books of documents and account relating to their financial affair or property. Only after five year of bankruptcy, he or she can apply to the Directory-General of Insolvency (DGI) for discharge.

The DGI will consider the cause of bankruptcy, the bankruptcy’s payment to all his creditors, bankruptcy tenure, health and age of the bankruptcy and the level of cooperation given in the administration of his affair, before decide to discharge a bankruptcy case.

Department of Official Assignee The Department of Official Assignee in Malaysia is one of the departments under the control and management of the Prime Minister’s Department with twenty-one (21) branches situated in towns where there is a High Court and the headquarters is located at Putrajaya.

The development of bankruptcy law in Malaysia is governed by the Bankruptcy Act 1967 (hereinafter referred to as “the Act”) which is derived from the English Bankruptcy Act 1883 that governed the trade and commerce in England. The English Bankruptcy 1883 was adopted and modified in accordance with the local needs. The Act 1967 has been amended a few times and the most recent amendment was on March 2000 and came into force on
1-10 - 2003.

With the coming into force of the Bankruptcy (Amendment) Act 2003, the head of the Department of Official Assignee Malaysia who was formerly known as Official Assignee is now known as the Director General of Insolvency (hereinafter referred to as “the DGI”). The change of the title has no effect to his dual functions and responsibilities in the administration of the estates of the bankrupts and companies in liquidation.

What Are The Restriction A Bankruptcy Will Face When a person becomes a bankrupt, all his property will be vested in the official assignee who is appointed by the government under the Bankruptcy Act 1967.

• Cannot leave the country except with DGI’s permission
• Not allowed to take a loan exceeding RM1,000 
• Not allowed to work with spouse, family or relatives’ company 
• Cannot be a company director or take part in the management of company. 
• Cannot be nominated for an elections. 
• Cannot maintain any action except with sanction of DGI. Bank Account

Once person is made a bankrupt, his existing account shall be deactivated and withdrawal of money would be debarred. A bankrupt, however, may open a bank account or continue using his existing account for reasons such as crediting his salary or any profit gained provided he obtains the permission of the DGI. He would then have to make an application for permission of DGI for reactivation of the account. The application to obtain the DGI's permission in both cases shall be made to the respective MDI (DGI) branch, where his bankruptcy case is being administered.

Purchasing Life Insurance Policy 

When a person becomes a bankrupt in law everything he owns (including his life insurance policies) becomes the property of the Official Assignee. He cannot buy an insurance policy without the permission of the Official Assignee.

The Official Assignee can and may give permission to a Bankrupt to buy a reasonable protection policy (i.e. a Term Policy) for the benefit of the bankrupt’s family. This permission has to be given in writing.

An effective route to address this problem is to get the spouse (of the bankrupt) to buy a policy on the life of the bankrupt. The policy will be owned by the spouse and not the bankrupt. In this arrangement, the official assignee will have no say over the policy.

Previous Insurance Proceed From Life Insurance Policy Before Bankruptcy Technically the Official Assignee manages all the assets of a bankrupt including the bankrupt’s life insurance policy. Where the life insurance policy is not assigned, then this policy shall be considered an asset of the bankrupt.

Insurance proceeds (claims, cash surrender value, maturity value, cash dividend, Bonus etc) are subject to the following treatments:-

A: Insurance Proceed - Bankrupt Still Alive
DGI is entitled to recover all insurance proceeds of life insurance from a bankrupt’s life insurance policy. For example, should a bankrupt exercise the option to terminate the insurance policy, DGI will seek to recover the cash surrender value. In another example, DGI is also authorize to recover insurance proceed from a claim proceed as a result of disability (example Critical Illness, Total & Permanent Disability).

B: Insurance Proceed – Death of a Bankrupt
In the event of death of a bankrupt, the insurance proceed shall be subject to the following treatments

I: Without Nominee - The insurance proceed (sum assured) shall be considered to be the estate of the deceased (bankrupt’s) where no nominee is named in the life insurance policy. The Official Assignee would have access to the insurance proceed

II: With Nominee - The insurance proceed is paid to the nominee and is creditor proof.

Employee Provident Fund (EPF)
DGI would exercise control over the EPF account of a bankrupt:-

Withdrawal – Bankrupt is Still Alive
A bankrupt is not entitled to with draw money from his/her EPF account without the written consent of the DGI. The DGI do provide written consent to bankrupt to withdraw money from his/her EPF in certain circumstance. However, it must be noted that the DGI can seek to recover the withdrawn money from the bankrupt.

Death Of A Bankrupt - In the event a bankrupt suffers death:-

A: Without Nominee - The EPF money shall be considered to be the estate of the deceased (bankrupt’s) where no nominee is amed. The Official Assignee would have access to the insurance proceed.

B: With Nominee - The EPF money shall be paid to the nominee and is creditor proof.

Keyman Insurance

Substantial number of life insurance policies had been incorrectly sold as Keyman Insurance to business owner especially to the SME.  This so-called “Keyman Insurance” is not in compliance with Inland Revenue Board (IRB) guideline (IRB Public Ruling 2/2003).

Business Owner

If you are a business owner and/or majority shareholder of a company, is obvious that you are the “key person” or keyman to your business. Unfortunately – this definition does not apply to “Keyman Insurance” under the life insurance industry.

Keyman Insurance

The keyman insurance is meant to protect a key employee in a company, against the loss of profit suffered by a company in case the key employee dies or is totally & permanently disabled. The beneficiary of keyman insurance policy is always the company (not the family member(s) of the keyman.

A simple test on the validity of Keyman Insurance is to focus on the beneficiary of the keyman insurance policy? If the beneficiary is the keyman’s family members, then it is not a keyman insurance! It is a normal life insurance policy.

Business owner will defend this and claimed that the premiums are paid by the company (not from the business owner’s pocket). Practically, a business owner can do this but it is not in compliance with the tax laws and there could be implications when IRB audits you.

Type of Insurance

The insurance plan that is suitable to implement keyman insurance and in compliance with IRD is as follows:-

• Term Life Policy
• Personal Accident Policy
• Investment-linked Policy
• Whole Life Policy
• Endowment Policy

Allowable Expense

Premiums of Keyman insurance is allowable based on the following IRD Guidelines.

           Term life and PA policy

           Term Life and PA policy have zero (or almost zero) element of savings (zero or         
           almost zero cash value at the end of the policy duration. Therefore the premiums
           paid are allowable deductions (allowable expenses) for the company.

Investment-linked, Whole Life & Endowment Policy

           Investment-linked, Whole Life & Endowment Policy have cash value, cash surrender
           value & maturity value. The premiums that are paid for protection is an allowable  
           deduction. The balance of premium paid that attracts cash values is not an allowable
           deductions (allowable expenses) for the company.

Taxation On Life Insurance Proceeds

The tax application on the life insurance proceeds (surrender cash value, maturity value etc) depends on the life insurance plans and the allowable deduction.  A simple guide is

Allowable Deductions

           If the company claim the premiums as an allowable deductions – then the proceed is
           income taxable to the company

Not Allowable Deduction

           If the company does not claim the premiums as an allowable deductions – then the    
           proceed is not income taxable to the company


Perquisite
A perquisite is a payment or profit received in addition to a regular wage or salary, especially a benefit expected as one's due (example, a tip, gratuity, use of company car, telephone, entertainment etc. All perquisite provided by the company is treated as income taxable item to an individual.

perquisite is exists when an insurance premiums are paid by the company to insure the life of keyman of the company (business owner, shareholder, director) and the beneficiary is the family members of the the keyman.

Allowable Deductions Under Individual Income Tax

Annual allowable deductions for individual under current IRD guidelines:-
1: RM6,000 (EPF and Life Insurance premiums combined)
2: RM3,000 Medical insurance & Children Education insurance Policy
3: RM3,00 Annuity plan
4: RM3,000 Private Retirement Fund

 

Gratuity Payment
A company receives insurance proceeds from insurer in the event a keyman suffers premature death. The company may decide to make a gratuity payment to the beneficiary of the keyman. The treatment for tax on the gratuity payment depends on the following:-  

No Contractual Agreement

          Gratuity payment to beneficiary is generally free from if there is no prior contractual     
          agreement (employment) prior to keyman’s death (Paragraph 14 of Schedule 6of the
          ITA 1967)

Contractual Agreement

           Gratuity payment to beneficiary is generally subject to tax if there is prior contractual
           agreement (employment) prior to keyman’s death. However, IRD normally does not
           seek to tax under this circumstance.

Purchasing Life

What is your need
Structure a life-insurance plan to meet your circumstances. For example: A single person might need less life insurance than a couple or a couple with children.

Buy from authorized agent
Use the services of trained insurance professionals. Check with LIAM (Life Insurance Association of Malaysia) to ensure that an agent and company are licensed to do life insurance business.

Get to know your agent
An agent isn’t permitted to be the beneficiary of a policy sold to you by the agent — unless the agent is a relative. Nor is the agent permitted to misrepresent any aspect of the policy being sold or a policy you already own, or encourage you to put incorrect information on an application.

Decide what type of policy you want
Term, whole life, universal life or a combination. Make sure you calculate your premiums for the life of the policy, as it is possible to pay more in premiums than the policy’s face amount.

See whether the policy has an accelerated-benefits feature
Policy provision that lets the policyholder, under certain conditions, collect part of the death benefit before he or she dies.

Be alert to any promise
That you won’t have to pay premiums again (the vanishing-premium pitch). Also, make sure you are aware of any “surrender” penalties.

Don’t sign any application
That isn’t completely and accurately filled in and dated. Make a copy for your files.

Study the policy
As soon as you receive it, to make sure it’s exactly what you ordered. Many companies offer a “free-look” (or “right to review”) provision; take advantage of it.

Review the rules
Only the policy holder may cancel the policy. If premium payments are not being made, the insurer generally sends a notice before cancellation.

Make out the premium payment
Make payment to the insurance company, not the agent.

Remember to pay
A failure to pay your premium will cause your policy to lapse or, potentially, to be terminated.

Review your policy periodically
Insurance needs change at different periods of life.