Life Insurance For Muslims: Halal Or Haram?

Life insurance is a contentious topic in Islam, with scholars debating its permissibility due to potential conflicts with Islamic laws and principles. The debate centres on whether life insurance involves elements of gharar (uncertainty or deception), riba (usury or interest), and maysir (gambling), which are prohibited in Islam. While some argue that life insurance contradicts Islamic teachings, others contend that certain types of life insurance, such as term life insurance and Takaful, can be permissible if they adhere to Islamic financial rules and principles. This introduction will explore the Islamic perspective on life insurance, including the key considerations, types of insurance, and their alignment with Islamic teachings.

Is life insurance contradictory to Islamic law?

Islamic law, or Sharia law, governs the day-to-day lives of Muslims and is derived from the teachings of the Quran and the Prophet Muhammad. The Quran does not specifically mention insurance, but it does encourage Muslims to be responsible and care for their families.

Life insurance is a way to provide financial protection for your loved ones, which aligns with these teachings. However, whether or not life insurance is considered haram (forbidden) or halal (permissible) in Islam depends on the specific type of policy and its adherence to Islamic rules and principles.

Types of Life Insurance

There are two main types of life insurance: term life insurance and whole life insurance. Term life insurance covers a specific period, whereas whole life insurance lasts for the insured's entire life.

Term Life Insurance and Islamic Law

Term life insurance may be considered halal by some Islamic financial experts because it is not an investment vehicle. It serves solely as financial protection during the years when a family needs it the most, such as while paying off a house or raising children. Since term life insurance does not earn interest, it may be preferable to whole life insurance, which typically has an investment component.

Whole Life Insurance and Islamic Law

Whole life insurance is often deemed haram because the investment component is considered gambling and making money from uncertainty, which is forbidden in Islam. Additionally, the uncertainty of whether a payout will be made in term life insurance policies can be seen as gharar, or uncertainty/risk/deception, which is also prohibited.

Takaful: An Islamic Alternative

Takaful is a form of Islamic insurance that is widely accepted by the Muslim community. It is based on the principles of cooperation, mutuality, shared responsibility, and solidarity. Policyholders are considered joint investors with the insurance operators, and there is no guarantee of a positive return on investment. Takaful eliminates uncertainty and does not involve interest or gambling, making it compliant with Sharia law.

In conclusion, while the concept of life insurance itself does not contradict the requirements of Islam, traditional life insurance policies may contain elements that are haram. Muslims seeking life insurance that aligns with their faith should look for policies based on the concept of takaful, which provides financial protection alongside long-term savings. It is essential to conduct due diligence and consult Islamic scholars or financial experts to ensure that the chosen policy complies with Islamic teachings.

What are the types of life insurance?

While there are two main types of life insurance—term life and permanent life—there are several subtypes of permanent life insurance to consider.

Whole Life Insurance

Whole life insurance is a permanent life insurance policy that can provide coverage for the duration of your life. An account within the policy builds cash value over time by using part of your premium payment and adding interest. Whole life insurance policies have built-in guarantees that the premium will not increase, the death benefit remains the same, and the cash value will earn a fixed rate of return. This type of policy is suited for people who want lifelong coverage and are willing to pay for the guarantees provided by the policy. However, because of these guaranteed features, whole life insurance is one of the more expensive ways to buy life insurance.

Universal Life Insurance

Universal life insurance can be cheaper than whole life insurance because it generally doesn’t offer the same guarantees. There are a few varieties of universal life insurance, and with some forms, you can vary premium payment amounts and adjust the death benefit amount, within certain limits. Universal life insurance often has a cash value component, and some varieties are suited for people who want to tie their cash value gains to market performance. The downside is that if cash value is your main interest, not all universal life insurance policies guarantee you’ll make gains.

Variable Life Insurance

This type of cash value life insurance is tied to investment accounts, such as bonds and mutual funds. Variable life insurance premiums are typically fixed, and the death benefit is guaranteed, regardless of how the market fares. There is potential for considerable gains if your investment choices do well, but it requires you to be hands-on in managing your policy because the cash value can change daily based on the market.

Burial Insurance or Final Expense Insurance

Also known as final expense insurance, burial insurance is a small whole life insurance policy that is meant to help your family pay for your funeral, burial, and other expenses after your death, like outstanding medical bills. The death benefit is guaranteed and typically ranges from $5,000 to $25,000. A medical exam isn’t usually required, making it more accessible to seniors with pre-existing health conditions. However, coverage is capped at low amounts, and if you die within two or three years of taking out the policy, your insurer may not pay the full death benefit.

Survivorship Life Insurance or Joint Life Insurance

These joint life insurance policies ensure two people under one policy, and the payout to beneficiaries is made when both have passed away. Survivorship life insurance can be beneficial in estate planning when the life insurance money is not needed by a beneficiary until both of the insured people have passed away. It can also be used to provide a donation to charity or to fund a trust. The downside is that if two spouses are insured and one would suffer financially if the other passed away, this is not the right policy type as the surviving spouse does not receive any life insurance benefits.

Mortgage Life Insurance

Mortgage life insurance is designed to cover only the balance of a mortgage and nothing else. The death benefit is paid to the mortgage lender, not a beneficiary that you choose. This type of policy is intended for people who are primarily concerned about their family being burdened by the mortgage if they pass away. However, it won’t provide financial flexibility for your family because the payout goes to your mortgage lender.

Credit Life Insurance

Like mortgage life insurance, this insurance covers a specific debt. When you take out a loan, you might be offered credit life insurance, and the payments can usually be rolled into your loan payments. The life insurance payout is the balance of the debt and is paid to the lender, not your family. If you’re concerned about how your family would pay a certain debt if you passed away, credit life insurance might look appealing and convenient. However, it doesn’t allow financial flexibility in the future, and you’re probably better off with term life insurance, which can be used to cover many concerns, from debt to income replacement to funeral expenses.

Supplemental Life Insurance or Group Life Insurance

The life insurance you may have through work is supplemental life insurance, also known as group life insurance. It sets rates based on the group, not the individual, and is usually free or inexpensive. It’s good as supplementary coverage to your own individual life insurance policy, but if you lose your job, you generally lose the life insurance, too.

What is whole life insurance?

Although life insurance is not expressly prohibited in Islam, there are some considerations that need to be taken into account when choosing an insurance plan that complies with Islamic law. For instance, it is important to ensure that the plan does not include interest, gambling, or deceit, as these are all prohibited in Islam.

Whole life insurance is a type of permanent life insurance that provides coverage for the entire life of the insured person. It is designed to protect families from financial risk in the future and typically has higher premiums than term life insurance. Whole life insurance policies guarantee a payout to the family of the insured when the insured person dies. These policies also have a savings component, known as the "cash value", which accumulates over time and can be accessed by the policyholder during their lifetime. Interest on the cash value accrues on a tax-deferred basis.

The premiums for whole life insurance are typically fixed and do not change over time. The death benefit is also guaranteed and is usually a large sum. Whole life insurance is often seen as an investment, as the cash value can grow over time and be used for loans or withdrawals. This type of insurance is particularly appealing to those who want to maximise the cash value for their loved ones.

There are several types of whole life insurance policies, including level payment, single premium, limited payment, and modified whole life insurance. Level payment policies have consistent premiums throughout the duration of the policy, while single premium policies involve a one-time large premium payment. Limited payment policies involve a limited number of higher premium payments, and modified whole life insurance offers lower premiums in the first few years followed by higher premiums in later years.

What is term insurance?

Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified number of years, typically between 10 and 30 years. It is considered the simplest and purest form of life insurance.

With term insurance, you pay a premium for a set period of time, and if you die during that time, a death benefit is paid to your beneficiary. The longer the term, the higher the premium. The premium is typically fixed and paid for the length of the term. If the insured dies before the policy expires, the insurance company will pay the death benefit to their beneficiaries. If the insured dies after the term expires, there is no payout.

Term insurance is much less expensive than permanent life insurance, such as whole life insurance, because it is not designed to last through old age, when premiums are the most expensive. Term insurance also has no cash value, unlike most types of permanent life insurance.

Term insurance policies are often "convertible", meaning they can be converted into a permanent life insurance policy, such as universal or whole life insurance, within a certain number of years after the policy is taken out. If you convert term life insurance to permanent life insurance, the premium will increase.

What makes Islamic life insurance policies permissible?

Islamic life insurance policies are permissible when they are compliant with Sharia law principles. One form of Islamic insurance is called Takaful, which is based on the principles of cooperation, mutuality, joint interests, and indemnity/debt, solidarity, and common interests. Policyholders of Takaful policies are considered joint investors with the insurance operators. Vendors and policyholders share the pooled money and any losses. There is no guaranteed return on investment, and no fixed profits. Takaful policies do not include elements of interest or gambling, which are prohibited in Islam.

Takaful is based on social solidarity, with the basic concept being that a group of people pool their funds together in a way that does not generate profit but acts as a mutual benefit to those within the group. Takaful is about communal, charitable ventures.

Another consideration for Muslims looking for Islamic insurance products is whether the policies contain elements of gharar, which refers to uncertainty, risk, and deception. Whole life insurance policies, also known as life assurance policies, are deemed compliant with Sharia law as there is no element of risk or uncertainty—the payout is made on death. However, term life insurance policies have been questioned as they involve an element of uncertainty about whether the payout will be made.

Muslims seeking insurance policies that comply with Islam and Sharia laws need to ensure that elements of uncertainty, risk, and interest are not present in the products they invest in.

Frequently asked questions