When Muslims hear the word “life insurance”, speculations arise if it is permissible in Islam to invest in this service and use the amount received in benefits. Many Muslims consider it to be haram because they perceive prohibited elements like uncertainty (gharar), high risk, gambling (maysir), and interest (riba) prevalent in insurance policies.
However, there has been extensive scholarly work in the past few decades suggesting that life insurance does not involve elements prohibited in the Islamic religion.
But as a Muslim, you are not convinced whether you are investing your amount in the right place and if your afterlife gets affected by it.
There is nothing to worry about. Let’s discuss the concept of life insurance and Islamic finance in detail to understand if life insurance complies with the teachings of Islam.
What is Life Insurance?
Life insurance is a contract between the insurance company and the policyholder where the policyholder pays some amount on an annual basis and the nominated beneficiaries receive a payout of the insurance once the policyholder dies.
Types of Life Insurance
There are two types of life insurance: whole life insurance and term life insurance.
In the whole life insurance policy, the beneficiaries receive a payout after the policyholder dies but the policyholder has to pay premiums.
In term life insurance, policyholders pay an amount for a specific timeframe. The timespan of an insurance policy can span 20 years. The beneficiaries receive death benefits if the policyholder dies during the 20-year timeframe but if the policyholder outlives the duration then there is no payout.
Considering that, you have to think very carefully when you are opting for an insurance policy. Muslims perceive that insurance policies are based on the concept of interest where beneficiaries receive a fixed amount at the end of the insurance policy. But that’s not the case in every life insurance plan.
The amount received in benefits can vary in different insurance policies, so you should closely evaluate the policy of an insurer if you opt to choose their policy and consult with an Islamic scholar to find if it complies with Islamic laws. So, let’s find that out.
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Is Life Insurance Compliant with Islamic Shariah?
The concept of takaful is considered by many Islamic scholars to comply with the tenets of Islamic finance.
Takaful is an Arabic word meaning “solidarity”. People mutually invest in a takaful insurance scheme and guarantee to cooperate with each other in case of financial losses and profits. All the members of the takaful scheme compensate for any participant’s losses or expenses related to money, property, vehicle, assets, health, and more.
No participant gains advantage over the other and takaful safeguards the interests of all the members. There is no uncertainty, interest, or high-risk element in takaful, making it compliant with Islam.
If you are investing in a takaful insurance policy, you need to understand how it works. It can help you make an informed investment decision in a takaful insurance policy and know the principles to evaluate an insurance company that provides policies based on Shariah.
How Takaful Works?
Takaful insurance requires all the participants to contribute to the fund by investing some money according to their financial goals and budget. Each participant has the option to choose a coverage plan according to the financial circumstances. The contribution by participants in the fund is considered a donation. This term is known as tabarru in Arabic.
The fund is organised by a takaful operator responsible for collecting funds and charging fees to cover marketing expenses, company’s operational costs, and claim reimbursements. The organiser pays out the claims from the takaful fund in the form of dividends or distributes funds into the participants in the insurance.
If you participate in a takaful fund, you can receive your settlements via cash, cheque, online transfer, or any other means explained in the agreement. You can also opt to invest your claims into the fund so it can reduce your premiums or other contributions to the fund.
Now let’s see how takaful, the Islamic insurance differs from conventional insurance.
Takaful Insurance versus Conventional Insurance
Islamic jurists believe that conventional insurance consists of elements like riba, gharar and maysir forbidden in Islam. Consequently, they consider investing in this insurance a sinful act.
Let’s understand it with examples.
For example, term insurance policies have the elements of gharar and maysir. If you invest in term insurance policy and you outlive the policy, you do not receive any payout. So, it is a high-risk investment and a gamble where there is uncertainty if you receive benefits because no one can guarantee death. You don’t know how long you are going to live, so if you outlive it, you do not get return on investment.
The element of riba is also present in conventional insurance policy. There is a fixed amount that the insurer pays you which can be a benefit and profit of your investment. This is the concept of interest.
However, Islam forbids predetermined profit margins. In Islamic principle, an investor receives a share of profit according to earnings and profits a business has generated. So, it is not fixed and investors also bear losses if a business fails to generate a lucrative revenue.
Takaful insurance policy sees participants as partners in losses and profits of the fund which is relatable to Shariah policies.
Choose A Shariah-Compliant Insurance Policy
Follow this guide and make a choice that benefits you in the financial matters of this worldly life and the afterlife. Consider a takaful company that does not feature coverage plans consisting of elements like riba, maysir, and gharar.
Evaluate all the policies beforehand and consult with an authorised Islamic jurist before investing your hard-earned bucks to avail benefits that secure your loved ones in a halal way.
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