The Distribution of Insurance and EPF in Malaysia
Birth, old age, sickness and death – these are the inevitable stages in human life.
The legal procedure after a person’s death can be complex, especially when a person dies intestate, or without leaving a will.
There are clear advantages to having a will. It allows the person making the will to choose their beneficiaries, determine how assets are to be distributed, and to appoint an executor to administer the estate.
On the other hand, when a person dies intestate, assets will be distributed in accordance with the Distribution Act 1985 and a court-appointed trustee or executor will administer the estate. This more cumbersome process may give rise to assets being distributed in a way that is not in accordance with the deceased person’s wishes, or family disputes.
That said, there are certain distributions that are considered distinct from a deceased’s inheritable estate. This article explores the distribution of insurance benefits and Employment Provident Fund (“EPF”) upon the death of an insured person or EPF member, respectively, in Malaysia.
Insurance
In Malaysia, monies under insurance policies do not form part of the deceased’s estate. This is to protect the interests of the insured’s spouse and children in the policy against a claim by any creditor of the insured.
This is provided for in section 23(1) of the Civil Law Act 1956:
23. Moneys payable under policy of assurance not to form part of the estate of the insured
(1) A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named, and the moneys payable under any such policy shall not so long as any object of the trust remains unperformed form part of the estate of the insured or be subject to his or her debts.
The relationship between the insurer and the insured (or the “deceased” for the purpose of the article) is a contractual one (see the Federal Court decision in Malaysian Assurance Alliance Bhd v Anthony Kulanthai Marie Joseph (suing as a representative of the estate of Martin Raj a/l Anthony Selvaraj, deceased) [2010] 4 MLJ 749).
Therefore, upon the death of the insured, the terms of the insurance contract will take effect – all monies payable under the insurance policy will then be paid to the named nominee in accordance with the insurance policy and the Financial Services Act2013 (“FSA 2013”).
The payment of policy monies is not automatic. The nominee must make an application to the insurer, notifying of the death of the insured and accompanied by proof of death. Upon receipt of such claim, the insurer shall pay the policy monies to the nominee. However, if the nominee fails to claim the policy monies within 60 days of the insurer becoming aware of the death of the insured, the insurer shall immediately notify the nominee in writing of his/her entitlement to claim the policy monies. Where the insurance company has been made aware of the death of the policy owner and notified the nominee of their entitlement, and within 12 months the nominee has failed to claim the policy monies, the insurer shall proceed as though no nomination was made.
In situations where the insured did not make any nomination in the policy, the insurer shall pay the policy monies to the lawful executor or administrator of the estate. Where the insurer is satisfied that there is no lawful executor or administrator of the estate at the time of payment, the insurer may pay the policy monies to the deceased’s spouse, child or parent in accordance with the Distribution Act 1958.
Therefore, insurance policy holders are advised to take necessary steps to nominate the intended recipients of the policy monies. This ensures that after the death of the insured, the policy monies will be paid to the intended recipient.
It is also advisable for the nominee to make the insurance claim as soon as possible after the death of the insured to ensure efficient payment of the policy monies.
It must be noted by virtue of section 25 of the Civil Law Act 1956, the nature of nomination varies for Muslim policy owners (also known as takaful participant). The nominee of a Muslim policy owner can either be an executor or a beneficiary of the takaful benefits. If a person is nominated as an executor, he/she will take the takaful benefits only as an executor and must distribute the monies in accordance with Faraid laws. However, a nomination for a nominee to be a beneficiary under a conditional hibah (granting ownership of property from one party to another without any consideration) [1] shall have the effect of transferring ownership. The takaful benefits payable to the nominee upon the death of the insured person shall be transferred to the named nominee.
Employees Provident Fund
The distribution of EPF mirrors that of insurance policies. The contributions and interest do not form any part of the deceased’s estate, and upon the death of the deceased, it shall remain separated from the deceased’s other assets (How Yew Hock (Executor of The Estate of Yee Sow Thoo, deceased) v Lembaga Kumpulan Wang Simpanan Pekerja [1996] 2 MLJ474). If nomination was made, the fund will then be payable to the nominee.
Section 54 (1A) of the Employees Provident Fund Act 1991 provides that the EPF member may make nomination for the purpose of payment of credit after the death of the member. When a nomination is made, it has the effect of appointing an individual or institution to receive and oversee the EPF savings in the event of one’s demise. A nominee would then be entitled to the nominated portion of the deceased’s EPF savings.
However, where the EPF member dies without first nominating a beneficiary, the member’s next-of-kin is entitled to make a claim for the monies in the savings. This includes:
- the member’s widow/widower, children (or their guardian);
- parents, or siblings for married members; or
- parents or siblings for unmarried members.
If the deceased left a will with a residuary estate clause (a clause that disposes of assets that have been overlooked or are left over), then the EPF savings will form part of the residuary estate of the deceased EPF member and shall be distributed in accordance with his or her express wishes. If a grant of probate or letter of administration has been taken out for the deceased’s estate, the executor or administrator may then act accordingly to apply for the withdrawal of the savings for the benefit of the named beneficiaries or the next-of-kin, as the case may be.
The amount varies according to when the application is made: [2]
In the event of one’s untimely demise, EPF savings may serve as an assurance that the deceased’s next-of-kin are financially cared for. For easy and convenient withdrawal upon death, all EPF members are highly encouraged to make nominations of beneficiaries early on.
Earlier this year, EPF clarified that where there is more than one beneficiary nominated and one of them dies, then only the portion that was bequeath to the deceased beneficiary will be invalid. If the EPF member failed to update his/her nomination before they died, then the surviving beneficiaries will receive their portion accordingly. However, if the member has named only one beneficiary and the beneficiary dies, then the nomination will be deemed void until a new beneficiary is nominated. [3]
Commentary
Other than making nominations for your insurance policies and EPF, it is important to remember that when creating wills and testaments, insurance policies and EPF savings are not to be included as assets.
The separation of both insurance and EPF from the estate of a deceased are restrictions created by lawmakers for the purpose of public policy, ensuring that loved ones are provided for upon the death of an insurance policy owner or EPF member. Hence, one should not consider insurance policies and EPF credits as a part of one’s inheritable assets.
If you have any questions or require additional information, please contact Jeyakuhan Jeyasingam or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law).
This alert is for general information only and is not a substitute for legal advice.
[1] “Managing Hibah” (My Government) <https://www.malaysia.gov.my/portal/content/27730> accessed 11 June 2024.
[2] “Helping Loved Ones in Times of Need” (EPF) <https://www.kwsp.gov.my/member/account-centre/death> accessed 11 June 2024.
[3] “Chain Messages on Nomination” (EPF) <https://www.kwsp.gov.my/w/chain-email-on-nomination> accessed 11 June 2024.