1. DESIGNATION OF BENEFICIARY IN FAMILY TAKAFUL CONTRACTS Ezzedine GHLAMALLAH Wednesday, April 9th, 2014

2. Summary  I. Introduction  II. Designation of beneficiary in the French Legal framework for family takaful (‘assurance-vie’)  III. Legal characterization of beneficiaries under Shariah  IV. Conclusion Designation of beneficiary in family takaful contracts

3. I. Introduction  French “life insurance” is a shell with both legal and tax benefits. It is not truly an insurance contract, rather a term deposit, close to family takaful.  Total amount outstanding of life insurance contracts: 1397 billions euros in late 2012  = 70% of French GDP  41% of French households own a life insurance contract. Designation of beneficiary in family takaful contracts

4. I. Introduction Designation of beneficiary in family takaful contracts

5. I. Introduction 1,8 billion Muslims in the world 16 millions in Europe 6 millions in France Rate of bancarisation 99 % Penetration rate of the insurance* 10 % *The penetration rate defines itself as the volume of the premiums divided by the GDP Designation of beneficiary in family takaful contracts

6. I. Introduction Designation of beneficiary in family takaful contracts

7. I. Introduction French market players of the Family Takaful  Swiss Life – Salam Epargne & Placement  Vitis Life – Amâne Exclusive Life  CIFIE – Independent committee of the Islamic Finance in Europe Designation of beneficiary in family takaful contracts

8. Summary  I. Introduction  II. Designation of beneficiary in the French Legal framework  III. Legal characterization of beneficiaries under Shariah  IV. Conclusion Designation of beneficiary in family takaful contracts

9. II. Designation of beneficiary in the French legal framework  “Stipulation for the benefit of a third party” (« stipulation pour autrui ») entitles the beneficiary with a personal, enforceable right against the insurer  This guaranteed amount does no longer belong to the policyholder; it is no longer part of his estate  (inheritance law does no longer apply). Designation of beneficiary in family takaful contracts

10.  “Stipulation for the benefit of a third party” entitles the beneficiary with a personal, enforceable right [to the amount promised by the contract].  This guaranteed amount does not to the policyholder’s estate. “Life insurance” is then a guarantee and wealth transfer instrument without tax nor legal (inheritance) constraints. Designation of beneficiary in family takaful contracts II. Designation of beneficiary in the French legal framework

11. Designation of beneficiary as an instrument of guarantee  Designation of the beneficiary by the contract qualifies her/him as a creditor up to the amount receivable.  Debt will be repaid (by the insurance company) and does not appear as a liability to the policyholder’s estate. Designation of beneficiary in family takaful contracts II. Designation of beneficiary in the French legal framework

12. Designation of beneficiary, a wealth transfer instrument  Designation allows for tax optimization when transferring a fraction of estate.  Designation endows the beneficiary independently of the portion given away as will.  The policyholder experiences specific rules of law and specific taxation.  When the policyholder dies, capital (or rent) do not belong to the policholder’s estate. The value of the contract is amenable to a specific tax regime. Designation of beneficiary in family takaful contracts II. Designation of beneficiary in the French legal framework

13. Acquisition of rights distinct from heritage law  The capital or the pension paid at the death of the policyholder to a beneficiary are not submitted to inheritance regulation: neither to the report rules nor to the reduction for reserve infrigement regulation. (the largest part of estate is reserved for the children)  Premium paid by the policyholder are exempt in the same way unless they were "obviously exaggerated in consideration of his/her [the policyholder] faculties" Designation of beneficiary in family takaful contracts II. Designation of beneficiary in the French legal framework

14. Profitable tax optimization  A long the beneficiary is nominated in the contract, the capital or the rent stipulated in the contract for his/her profit does not belong the policyholder’s estate. There should then be NO taxation. This exemption si limited in two mays:  The article 757 B of the CGI [Code General des Impôts]  The article 990 I of the CGI [= General Tax Code]  (Death duties in France start from the first euro: rate is 5% to 45% for children & mate; 35-45% for brother/sister; 55% for family; 60% for others. ) Designation of beneficiary in family takaful contracts II. Designation of beneficiary in the French legal framework

15. Summary  I. Introduction  II. Designation of beneficiary in the French Legal framework  III. Legal characterization of beneficiaries under Shariah  IV. Conclusion Designation of beneficiary in family takaful contracts

16. III. Legal characterization of beneficiaries under Shariah Problem The policyholder disposes during his lifetime of his estate for the benefit of a beneficiary: this disposition will become effective after the policyholder’s death. Is this a bequest (Al Wasiyah) amenable to inheritance (Al Mirath) law? Or Shall we accept the French legal practice: the asset value is written off the policyholder’s wealth as soon as the life insurance contract is underwritten; it then belongs to the insurance company’s balance sheet? Designation of beneficiary in family takaful contracts

17. The profitable clause qualified as leg integral part of the inheritance  Malik related to me from Nafi from Abdullah ibn Umar that the Messenger of Allah, may Allah bless him and grant him peace, said, "It is the duty of a muslim man who has something to be given as a bequest not to spend two nights without writing a will about it.".  Mâlik brought reported : "The established sunna with us, in which there is no dispute, is that it is not permitted for a testator to make a bequest (in addition to the fixed share) in favour of an heir, unless the other heirs permit him. If some of them permit him and others refuse, he is allowed to diminish the share of those who have given their permission. Those who refuse take their full share from the inheritance”.  Malik related to me from Ibn Shihab from Amir ibn Sad ibn Abi Waqqas that his father said, "The Messenger of Allah, may Allah bless him and grant him peace, came to me to treat me for a pain which became hard to bear in the year of the farewell hajj. I said, 'Messenger of Allah, you can see how far the pain has reached me. I have property and only my daughter inherits from me. Shall I give two thirds of my property as sadaqa?' The Messenger of Allah, may Allah bless him and grant him peace, said, 'No.' I said, 'Half?' He said, 'No.' Then the Messenger of Allah, may Allah bless him and grant him peace, said, 'A third, and a third is a lot. Leaving your heirs rich is better than leaving them poor to beg from people. You never spend anything on maintenance desiring the Face of Allah by it, but that you are rewarded for it, even what you appoint for your wife." Designation of beneficiary in family takaful contracts III. Legal characterization of beneficiaries under Shariah

18.  The Muslims are thus encouraged to bequeath up to a third party of their fortune through a will to beneficiaries not heirs.  Here are some examples of people who do not inherit automatically under Sharia and who could be indicated (appointed) beneficiaries of a Sharia compliant life insurance policy: the non-Muslim parents (the Islam decreed that the non-Muslim parents receive a transmission on behalf of their Muslim children), the child born out of wedlock who in the Muslim tradition inherits from his/her mother and not from his/her biological father, the Jewish or Christian wife of the policyholder, or his creditors.  The beneficiary must comply with two rules: he does not have to be a heir and the will is limited at the most to one third of the fortune of the deceased. The subscriber of the Sharia compliant life insurance policy can however indicate one or several legitimate heirs provided that the other heirs give the right to him. Designation of beneficiary in family takaful contracts III. Legal characterization of beneficiaries under Shariah

19. Designation of beneficiary to meet the rules of Islam  Under French law, capital or rent receivable after the policyholder’s death is not submitted to death duty. Court of Cassation (C. ass. Art. L 132-12).  For which motive then consider the designation as a bequest which would not obey French law, while this legal system prevails?  Why shall we apply Islamic inheritance law (mirath) while the rules of transmission of property by inheritance is not applied in life insurance in French law? Designation of beneficiary in family takaful contracts III. Legal characterization of beneficiaries under Shariah

20. Designation of beneficiary to meet the rules of Islam  Our approach allow for:  Comply with the Quranic law regarding inheritance sharing inside the French legal framework.  Use designation in order to share the estate according to the Sharia. Ex.Two children, according to french law, must have both one half. Using designation, one third (quotité disponible) can be given to a boy, leaving one third for his sister. Designation of beneficiary in family takaful contracts III. Legal characterization of beneficiaries under Shariah

21. Designation of beneficiary to meet the rules of Islam Example with four children: two males, two females – mirath would give 1/6th to every daughter and 1/3th to every son. This is no directly possible under French egalitarian law. The amount disposable is only ¼: by giving it to sons, every daughter would receive 3/16 and every boy 1/4 = 4/16. Still does not meet the mark. In order to meet the shariah standard, the father can take another 1/9 of his estate to give it to his sons designated through life insurance. In this case every son will enjoy 1/18 (via life insurance) + 8/9x1/8 (via disposable amount) + 8/9x3/16 (via reserve) = 0,333 while every daughter would have ¼ of the reserve (8/9x3/4)=0,167. Designation of beneficiary in family takaful contracts III. Legal characterization of beneficiaries under Shariah

22. Summary  I. Introduction  II. Designation of beneficiary in the French Legal framework  III. Legal characterization of beneficiaries under Shariah  IV. Conclusion Designation of beneficiary in family takaful contracts

23. IV. Conclusion  The writer of the profitable clause compatible Sharia will be a function of the legal qualification in Muslim law which will be made.  Qualified as leg, the profitable clause of the life insurance policy compatible Sharia allows to bequeath up to a third party of the fortune of the insurant to beneficiaries not heirs, she can be used for example to make a legacy to non- Muslim parents, to born child out of wedlock, to Jewish or Christian woman or still intervene as guarantee with one creditors. The beneficiary of the clause not in front of not to be a heir with a leg not in front of not to exceed a third party of the fortune of the deceased by knowing that the subscriber of the life insurance policy compatible Sharia keeps the possibility of indicating one or several legitimate heirs provided that the other heirs give the right to him.  Qualified off succession as it is the case in French law, it allows to appoint the legitimate heirs and to draft a typical clause compatible Sharia for a sharing according to the rules of the Sharia while staying in compliance with the French law. Designation of beneficiary in family takaful contracts

24. Thank you for your attention Designation of beneficiary in family takaful contracts