Say hello to takaful : An alternate for conventional insurance.

What is takaful?
Takaful is derived from an Arabic word means mutual responsibility, an alternative term to Islamic insurance.

What are the principles underlying Takaful insurance?
The principles of Takaful insurance are as follows:

a)Policyholders cooperate among themselves for their common good.
b)Every policyholder pays his subscription to help those that need assistance.
c)Losses are divided and liabilities spread according to the community pooling system.
d)Uncertainty is eliminated in respect of subscription and compensation.
e)It does not derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of “bear ye one another’s burden.”


Why is conventional insurance not permissible in Islam?

Conventional insurance contains elements contradictory to Islamic Shari’ah.

Gharar: “Uncertainty”

The insurance contract contains uncertainty due to:
a)Uncertainty whether the payment will be accepted as promised
b)The amount to be paid is not known
c)The time it will occur is not known

Any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is classified as Gharar.

When a claim is not made the insurance company may acquire all the profits whilst the participant may not obtain any profit whatsoever. The loss of premiums on cancellation of a life insurance policy by the policyholder, or the "double standard" condition of charging a customary short period in general insurance, whilst only a proportional refund is made if the insurance company terminates the cover is also considered as unjust.

Maisir: Gambling

a)The participant contributes a small amount of premium in hope to gain a large sum.
b)The participant loses the money paid for the premium when the insured event does not occur. c)The company will be in deficit if claims are higher than contributions.
d)When a life insurance policyholder dies after only paying part of the premium his dependants receive a certain some of money which the policyholder has not been informed of and has no knowledge as to how and from where it has been derived.

Riba: Interests

An element of interest exists in conventional life insurance products - as the insured, on his death, is entitled to get much more than he has paid.

Insurance funds invested in financial instruments such as bonds and stocks contain and element of Riba