Life insurance
Life insurance as a concept does not contradict the requirements of Islam. In essence, this insurance is similar to the principles of compensation and shared responsibility among the community where all participants guarantee each other against unpredicted future financial risk that would alter the financial situation of participant’s families. However, Muslim Jurists are of the opinion that life insurance is haram because it distrusts in Allah’s providence and does not take into consideration that He has decreed the moment of death of all human beings. However, it has been argued that what is being insured against is not death, but the adverse material consequences of it on widows, orphans and other helpless members of the community. In fact, life insurance ensures solidarity among participants and provides material protection for the offspring of the deceased, which was encouraged by the Prophet (pbuh).
In addition, the operations of conventional life insurance do not conform to the rules of Shari'ah as they may embody the elements of Gharar in the contract of insurance, Maysir as the consequences of the presence of uncertainty and Riba in the investment activities of the insurance companies. In fact, there are unknown or uncertain factors in operation of a contract in life insurance contracts about whether the payment will be accepted as promised, about how long the payment and about the exact amount the beneficiaries will get. And since the insurance company may acquire all the profits if no claim is not made, this operation can also be considered as Gharar which also occurs in any form of contract which is unbalanced in favour of one party at the expense and unjust loss to the other. However, some scholars consider that Gharar may be tolerated when the contract is restructured on the basis of cooperation or mutuality instead of a profit motivated insurance company. Maysir in the case of life insurance arises as the consequence of the presence of Gharar. In fact, the participant contributes a small amount of premium in hope to gain a large sum. If the life insurance policyholder does not die within the defined period, the participant loses its contributions. And if he dies after only paying part of the premium his dependants receive a certain some of money which the policyholder ignore the amount or the origin. Also if claims are higher than contributions, the company will be in deficit. However, gambling is remedied by the fact that it is a contract based on overwhelming statistical knowledge and the application of the theory of probability. Furthermore, a conventional life insurance policy premium may be invested in Riba-based assets and transactions. The element of Riba also occurs when on the death of the insured, he gets much more than he has paid. The solution would be to use policyholders contributions paid on the basis of profit-and-loss sharing system that is free from elements of Riba.
In addition, the operations of conventional life insurance do not conform to the rules of Shari'ah as they may embody the elements of Gharar in the contract of insurance, Maysir as the consequences of the presence of uncertainty and Riba in the investment activities of the insurance companies. In fact, there are unknown or uncertain factors in operation of a contract in life insurance contracts about whether the payment will be accepted as promised, about how long the payment and about the exact amount the beneficiaries will get. And since the insurance company may acquire all the profits if no claim is not made, this operation can also be considered as Gharar which also occurs in any form of contract which is unbalanced in favour of one party at the expense and unjust loss to the other. However, some scholars consider that Gharar may be tolerated when the contract is restructured on the basis of cooperation or mutuality instead of a profit motivated insurance company. Maysir in the case of life insurance arises as the consequence of the presence of Gharar. In fact, the participant contributes a small amount of premium in hope to gain a large sum. If the life insurance policyholder does not die within the defined period, the participant loses its contributions. And if he dies after only paying part of the premium his dependants receive a certain some of money which the policyholder ignore the amount or the origin. Also if claims are higher than contributions, the company will be in deficit. However, gambling is remedied by the fact that it is a contract based on overwhelming statistical knowledge and the application of the theory of probability. Furthermore, a conventional life insurance policy premium may be invested in Riba-based assets and transactions. The element of Riba also occurs when on the death of the insured, he gets much more than he has paid. The solution would be to use policyholders contributions paid on the basis of profit-and-loss sharing system that is free from elements of Riba.
Importance of Family Takaful
A family Takaful is a long-term savings and investment programme that provides mutual financial assistance and protection among its participants and their families based on teachings of Shari’ah. If the participant dies, his contributions could help alleviating the burden of his family, and on survival, the participant is assured of a sum of money to cover his payouts during periods of hardship such as retirement needs or medical expenses.
The importance of Family Takaful lies in the fact that it is an Islamic viable alternative to conventional life insurance, its policies allow the policyholders to enjoy the same level of cover provided by conventional insurance and at the same time to assist the unfortunate needy in times of their need due to untimely death and other mishaps resulting in permanent injury or disability.
Family Takaful plans can include the creation of funds to cover specific purposes such as children’s education, hospitalization, or business protection interest against key-employee’s death. Therefore, these plans can provide financial protection against various unforeseen risks that could have devastating effects on both individuals and businesses. These plans are therefore in line with the Islamic philosophy of cooperation, shared responsibilities and mutual help and have healthy impact on the socio-economic stability of the societies where they are operating.
In addition to the risk protection it proposes, Family Takaful is also a good attractive option for investment, as insurance products tend to be more profitable compared to normal investment schemes, plus the bonuses they propose. Insurance companies mobilise long-term funds in the form of policyholder contributions and proceed to invest part of them in the capital market, which gives them the status of major investors. Thanks to their investments they contribute to the development of capital markets, especially for Islamic financial markets, and thus they contribute to the economic growth of the country.
The importance of Family Takaful lies in the fact that it is an Islamic viable alternative to conventional life insurance, its policies allow the policyholders to enjoy the same level of cover provided by conventional insurance and at the same time to assist the unfortunate needy in times of their need due to untimely death and other mishaps resulting in permanent injury or disability.
Family Takaful plans can include the creation of funds to cover specific purposes such as children’s education, hospitalization, or business protection interest against key-employee’s death. Therefore, these plans can provide financial protection against various unforeseen risks that could have devastating effects on both individuals and businesses. These plans are therefore in line with the Islamic philosophy of cooperation, shared responsibilities and mutual help and have healthy impact on the socio-economic stability of the societies where they are operating.
In addition to the risk protection it proposes, Family Takaful is also a good attractive option for investment, as insurance products tend to be more profitable compared to normal investment schemes, plus the bonuses they propose. Insurance companies mobilise long-term funds in the form of policyholder contributions and proceed to invest part of them in the capital market, which gives them the status of major investors. Thanks to their investments they contribute to the development of capital markets, especially for Islamic financial markets, and thus they contribute to the economic growth of the country.
Takaful Funds
The Participants Takaful fund collected through the regular contributions made by the participants is put into two accounts; Participants’ Special account (PSA), which is treated as charity for the purpose of mutual help according to the principles of Tabarru` or donation, and Participant’s account (PA), where the fund is meant for savings and investments only. The proportion of the Takaful Tabarru’ is determined based on actuarial values, such as the expected claim rate; the incidence of claim; the basic cover; the provisioning basis for reserves; the profit-sharing expectation between the Operator and participant; and any expenses or commission loading (Family Takaful Business by IIBI; 2009). Participants contributions to cover potential future claims is credited to both accounts will be pooled by the Takaful Operator to a single fund for the purpose of investment activities according to the principles of Mudarabah and all returns on the investment will be pooled back to the fund.
Mutual financial assistance such as Family Takaful benefits to fellow participants in case of death, disablement or injuries is paid from the PSA fund; whereas, the proportion of contributions that is put into PA fund is destined for savings and investments only. With this separation between the two accounts, the amount that has been relinquished as Tabarru’ in the PSA account will not be refunded to the participant, in fact, the participant has the right to claim only from the PA account. And if no claim is made during the policy period, at maturity, the participant is entitled to a share of the surplus in the PSA fund and well as the proportion of his Takaful instalments that have been credited into the PA fund including his share of investment profits.
Mutual financial assistance such as Family Takaful benefits to fellow participants in case of death, disablement or injuries is paid from the PSA fund; whereas, the proportion of contributions that is put into PA fund is destined for savings and investments only. With this separation between the two accounts, the amount that has been relinquished as Tabarru’ in the PSA account will not be refunded to the participant, in fact, the participant has the right to claim only from the PA account. And if no claim is made during the policy period, at maturity, the participant is entitled to a share of the surplus in the PSA fund and well as the proportion of his Takaful instalments that have been credited into the PA fund including his share of investment profits.
