Islamic Perspective On Life Insurance: Halal Or Haram?

Life insurance is a contentious issue in Islam, with some arguing that it is haram (forbidden) while others consider it halal (permissible). The key concerns centre around three elements prohibited by Islamic law: uncertainty (gharar), gambling (maysir), and interest (riba). Traditional life insurance policies are often deemed haram due to the presence of these factors. However, Islamic scholars have proposed alternatives, such as Takaful, a form of Sharia-compliant insurance that aligns with Islamic principles of cooperation, mutuality, and shared risk. Takaful eliminates uncertainty and interest by having participants pool their funds together, investing them in halal options, and sharing any profits or losses. While Takaful is widely accepted, some Muslims still have reservations about life insurance, arguing that it encroaches on Allah's domain by seeking to insure against loss of life. Ultimately, the permissibility of life insurance in Islam depends on the specific policy and the individual's interpretation of Islamic teachings.

Uncertainty, risk and deceit

Uncertainty (Gharar)

Uncertainty refers to the speculative element or degree of uncertainty in a transaction. Term life insurance policies, for instance, involve uncertainty about whether a payout will be made, depending on whether the insured person dies during the term of the insurance. This uncertainty is deemed to add a nuance of gharar to term life insurance policies. On the other hand, whole life insurance policies are generally deemed more certain and thus compliant with Sharia law, as there is a guaranteed payout upon death.

Risk

Muslims seeking Islamic insurance products and services must consider whether elements of uncertainty, risk and interest are present in the insurance products they invest in.

Deceit

Life insurance is often deemed haram because it involves deceit or gharar, which is forbidden in Islam. This includes buying or selling something where it is unclear whether what is being bought or sold will be achieved or delivered, putting one's money at risk.

Takaful as an Alternative

Takaful is a form of Shariah-compliant insurance that is widely accepted by the Muslim community. It is based on the principles of cooperation, mutuality, joint interests, and solidarity. Policyholders are considered joint investors with the insurance operators, sharing pooled monies and any losses. There is no guaranteed return on investment, and there are no definite profits. Takaful policies are also free from riba (interest) as they invest in Shariah-compliant assets.

Interest

Life insurance plans that include interest payments are not compliant with Islamic law. For example, endowment insurance policies that promise a guaranteed payment often invest in financial products and businesses that contain elements of riba.

However, some types of life insurance, such as term life insurance, are considered permissible by some Islamic financial experts because they are not investment vehicles and do not earn interest.

Takaful, a form of Sharia-compliant insurance, is also considered halal. It is based on the principles of cooperation, mutuality, joint interests, and indemnity/debt. Policyholders of Takaful insurance are considered joint investors with the insurance operators, and there is no guarantee of a positive return on investment or fixed profits.

Gambling

There are several verses in the Quran and sayings of Prophet Muhammad (peace be upon him) that clearly prohibit gambling. In the Quran, Allah says:

> O you who believe! Wine, gambling, altars and divining arrows are filth, made up by Satan. Therefore, refrain from it, so that you may be successful. Satan wishes only to plant enmity and malice between you through wine and gambling, and to prevent you from the remembrance of Allah and from Salāh. Would you, then, abstain? (5:90-91)

Prophet Muhammad said:

> Whosoever says to his companion: 'Come let us play a game of chance or gamble', should give charity (as atonement) (Sahih al-Bukhari and Muslim).

In terms of insurance, conventional insurance is often considered non-compliant with Islamic law due to the elements of riba (interest) and gambling (qimar).

Takaful as an alternative

Takaful is a Shariah-compliant alternative to conventional insurance, which is often deemed unacceptable in Islam due to its non-conformity with Islamic principles. Conventional insurance is believed to go against Islamic restrictions on riba (interest), al-maisir or maysir (gambling), and al-gharar (uncertainty).

Takaful, on the other hand, is a co-operative system of reimbursement or repayment in case of loss, organised as an Islamic alternative to traditional insurance. It is based on the idea of shared responsibility and mutual protection, where members contribute money to a shared pool to guarantee each other against loss or damage. This system eliminates uncertainty and is not considered gambling because the purpose is not to make a profit but to ease the risk faced by contributors.

The principles of Takaful are as follows:

• Members cooperate for their common good.
• Member contributions are considered donations or gifts to the fund.
• Every member pays their contribution to help those in need.
• Losses are divided, and liabilities are spread according to the community pooling system.
• It does not gain advantage at the cost of others.

There are several models for implementing Takaful, including the Mudharabah model (profit-sharing), the Tabarru'-based model (where "donations" are accumulated into a fund to meet members' losses), and a combination of the two.

Takaful has been praised as providing "superior alternatives" to insurance, promoting values such as "personal dignity, community self-help, and economic self-development". However, it has also been criticised for becoming too similar to conventional insurance, merely using Arabic terminology and language in its contracts.

Despite these criticisms, Takaful is widely accepted as a legitimate form of insurance in the Islamic world and has grown significantly in recent years, particularly in the Gulf Cooperation Countries and other areas of the Middle East.

Whole life insurance

Uncertainty in whole life insurance arises from the possibility that the policyholder may pay premiums for their entire life without receiving any benefits if they outlive the policy. This uncertainty can be deemed as gharar, which is prohibited in Islam.

Additionally, whole life insurance policies may involve interest (riba) if the insurance company invests the premiums in interest-based assets or transactions. Riba is not permissible in Islam, and its presence in a whole life insurance policy would make it non-compliant with Sharia law.

However, some scholars argue that whole life insurance can be permissible in Islam if the underlying investments are Sharia-compliant. For example, Muslims in the Middle East can opt for a takaful operator, who will only invest in halal assets. In Western countries, it may be challenging to find policies that allow policyholders to dictate the underlying investments, but it is possible to choose policies where the underlying assets are largely Sharia-compliant and donate the non-compliant portion as charity.

Overall, while whole life insurance is not inherently haram, it is important for Muslims to carefully evaluate the terms and underlying investments of any insurance policy to ensure compliance with Islamic principles and Sharia law.

Frequently asked questions