In understanding the consequences of bankruptcy affecting life insurance policies, we must first know and get familiar with the legal processes and terminology involved. When an individual is insolvent and therefore unable to pay his debts, legal proceedings may be instituted against him. If the debt is not settled, the final step in this process is for the creditors to petition for a bankruptcy order against him. This order is issued by the courts and is the most effective way to enforce a judgment order against a debtor for the purposes of recovery of moneys owing to the creditor. The effect of a bankruptcy (receiving and adjudication) order is to freeze the assets of the debtor and subsequently to distribute them amongst his creditors. The various stages, rules and procedure of these steps are governed by the Bankruptcy Act 1967 of which the amendments passed in 2003 are significant.
Notable amongst these amendments is that debts owing to creditors must be a minimum sum of RM 30 000.00 for a bankruptcy petition to be initiated. Another important change is that duties of the Official Assignee are now placed in the hands of the Director General of Insolvency (DGI). The person holding this office (or his representative) is effectively responsible for the management of the affairs of the debtor and has wide discretionary powers as provided in the Bankruptcy Act.
Once a person has been declared a bankrupt, it is his responsibility to declare to the DGI all his assets and income as well as to cooperate with him in carrying out his duties. These duties include the gathering of the assets of the debtor, managing and eventually distributing them amongst the creditors. The bankrupt can no longer enter into any contracts or financial dealings without the consent of the DGI. Any moneys or assets received by the bankrupt must be declared to the DGI who will allow him to use those for the necessary expenses of maintenance of himself and his family. In this aspect, the DGI has a discretion including whether to allow for the payment of life insurance premiums by the policy owner if he is declared a bankrupt. It must be noted that he is under no obligation to make any such allowances.
Trust Policies Under Section 166 of the Insurance Act 1996.
Section 166 of this Act provides for the creation of trusts of insurance policies for the benefit of spouse, children and (in some cases) parents, if they are named as nominees of a non-muslim policy owner. It further states that proceeds of death claims of such policies “shall not form part of the estate of the deceased policy owner or be subject to his debts”. This trust, which is a unique “statutory gift”, is a benefit not available to any other assets of a policy owner. This is because other subsections in Section 166 allow the policyowner to deal with the trust policy (under certain conditions) during his lifetime but nevertheless provides this ‘creditor protection’ benefit to his family members. Thus, it can be stated that although the trust is created during the lifetime of the policyowner, the benefit only crystallises upon his death. It is therefore clear that creditors, through the office of the DGI in bankruptcy proceedings, cannot lay a claim on these moneys. They can however, lay a claim of the cash values of the policyowner because this is deemed to be part of his assets during his life-time. The DGI in these circumstances may write to the insurance company to provide for details of the policy especially the cash (or surrender) value and has a discretion to further direct it to terminate the policy contract and forward all available moneys to him.
Although death claim proceeds are “credit protected” as stated above, this benefit can be revoked if creditors successfully obtain such an order from the court on the grounds that premiums under the policy were paid to defraud them (Section 166(5) Insurance Act 1996).
Absolute Assignment of a Life Insurance Policy.
Absolute Assignment of a Life Insurance Policy.
The effect of Section 52 of the Bankruptcy Act is that an Absolute Assignment of a life insurance policy, unless made to a purchaser (or for valuable consideration) in good faith, is deemed void against the DGI if such an assignment was effected within 2 years of the bankruptcy. This means the DGI can direct such policies to be surrendered and realize the cash value, as he would in dealing with the other assets of a bankrupt. If death occurs to the bankrupt / assignor, the death claim proceeds of the policy may therefore be used to distribute amongst the creditors. The provisions of this section further state that in certain circumstances the assignment may also be deemed void, if it was created within 5 years of the bankruptcy.
This article attempts to convey a simple overview of the law in relation to bankruptcy and its effect on life insurance policies. It is written with the intention to minimise legal language as far as possible which always runs the risk of incompleteness. Furthermore, these is very little case law (or recorded cases) in this subject which may help one to understand the practical issues better. However, it must be noted that the Director General of Insolvency (previously the Official Assignee) has wide discretionary powers in dealing with the assets of the bankrupt.