Nominations in Life Insurance and Family Takaful Contracts

The legal principles that are applicable to the issues of nominations and the payment of claims are regulated by the Financial Services Act (‘FSA’) 2013 and the Islamic Financial Services Act (‘IFSA’) 2013. These principles also apply to Personal Accident contracts. One of the more common issues when it comes to the payment of claims is whether the named nominee is entitled to keep the moneys paid out or whether they are under a duty to distribute to others. 

The following are some fundamental aspects of nominations and claims which all those involved in the industry are recommended to be familiar with:

1. If there is a valid death claim, the named nominee must be paid the full proceeds by the insurer or  operator.

2. The word ‘nominee’ is used when a policy owner buys a policy on his own life and appoints the named nominee to receive the death claim proceeds. Similarly, this principle applies to a participant in a takaful contract.

3. Insurance companies and takaful operators require the relationship between the policy owner and the nominee to be stated in the contract, but this is not a requirement by the FSA or IFSA.

4. Although it is routine for the Claims Departments to request for ‘proof of relationship’ between the policy owner and the nominee, a claim cannot be denied or withheld merely because the claimant cannot provide this ‘proof’.

5. Appointing a person as a nominee, has nothing to do with insurable interest, as the latter is a requirement only when a person buys an insurance or takaful contract on the life of another.

6. Payment of death claim proceeds to nominees must be noted as a ‘two-stage process’. 

     i) Firstly, it is for the insurer or operator to pay out the claim to the nominee.

    ii) Secondly, the nominee who receives the moneys or benefits may sometimes keep the             moneys for himself and in some situations the law imposes a duty on the nominee to              distribute them to others. 

7. If the nominee, upon receiving the death claim moneys has a right to keep the moneys for himself, he is deemed to be the ‘beneficiary’. This is seen in a life insurance trust policy or in the case of a conditional hibah in a takaful contract.

8. If the nominee has a duty by law to distribute the money to others, he is deemed to be the ‘executor’. This happens in circumstances when the nominee is one who is named in a ‘non-trust’ policy, whereby the moneys have to be distributed according to the instructions set out in a Will or as per the Distribution Act 1958. For Muslim participants of takaful contracts, the executor has to distribute the benefits in accordance with the Faraid rules.