You are currently viewing The role of insurance in estate planning and probate in Malaysia

The role of insurance in estate planning is an important one – one that many people overlooked. People often have a very basic understanding of the role of insurance in estate planning, and that’s all right. However, if you hadn’t known about the role of insurance in estate planning, then you have come to the right place. 

The role of insurance in estate planning is a very straightforward one. In this article, we will summarize and explain the role of insurance in estate planning. 

The Basics 

Here’s the basics on what you should know about insurance in estate planning. There are 3 main roles of insurance policies in your estate planning: 

a.      You named beneficiaries receive death benefits from your insurance 

When you have passed away, the death benefit (a.k.a.: death benefit) gets distributed to your named beneficiaries. Or it will go to your estate if you hadn’t named anyone at the point of your death. 

b.      It provides liquidity that is helpful for your estate 

It provides easy access to cash from your life insurance upon your death. If your estate is in need for money, then this is where life insurance can be useful. Sometimes, you may not need to have passed away in order to access cash from your insurance policy. You still can access cash from your life insurance policy when you are still around. Of course it would also depend on the kind of insurance policy you have too. 

c.       Financial support for your loved ones 

This is provided your loved ones are named beneficiaries of your insurance policy and/or your estate. It wouldn’t make sense if some strangers on the streets benefit off your insurance policy, would it? As long as your loved ones are named beneficiaries, they will benefit off your insurance policy tied to you. 

Are insurance payouts in Malaysia tax-free? 

This is a valid question if you are asking it. The short answer is no. 

Death benefits from all kinds of life insurances are income tax-free. That simply means upon its payout, the beneficiaries will not need to pay any taxes to the Inland Revenue Board IRB / LHDN. Whatever payout you get, you will get all 100% of it.

Let’s say the insurance policy’s death benefit is RM150,000, the beneficiaries will get the entire amount. Of course it will be distributed according to what the policy holder has set within the insurance policy’s distribution. If there are no beneficiaries named, then the distribution of the death benefit will follow the Distribution Act of Malaysia

Income replacement and access to cash 

Many people think that insurance is a get-rich-quick scheme for beneficiaries. That is not entirely true if you have certain basic knowledge of insurance and how money and finance works. 

Considering how if you have debts to pay off and funeral expenses to settle, then the death benefit is not working as a get rich quick scheme. 

For example: 

Death benefit: RM150,000
Debt: RM50,000
Funeral expenses: RM30,000


50% for beneficiary 1

50% for beneficiary 2

Remaining amount after deducting funeral expenses and debts: RM70,000


Each beneficiary gets: RM35,000

The above table is a simple example of how payout works upon the death of an insurance policy. That payout distribution between the 2 beneficiaries were just an example of how insurance payouts work. It does not mean that if the death benefit is RM150,000, the 2 beneficiaries will get RM75,000 each. 

There are other expenses the policy holder may still need to settle before having the remainder is evenly distributed to the beneficiaries. If there are no debts from the policy holder, then at the most the money will be used to pay for the funeral expenses. Only then are the remaining death benefits evenly distributed to the beneficiaries. 

Bottom line 

Insurance payouts for your estate planning may not necessarily be the most complicated thing in the world. If you need help with insurance payouts and estate planning, feel free to reach out to us for further assistance. We will be more than happy to help you with it.