Life Insurance: Halal Or Haram?

Life insurance is a topic of debate among Muslims, with some arguing that it is haram due to the involvement of elements like interest, uncertainty, and gambling, which are prohibited in Islam. However, others believe that certain types of life insurance, such as term life insurance, can be considered halal as they do not include these forbidden elements. The key considerations are whether the insurance policy involves interest (riba), uncertainty (gharar), and gambling (maysir). While traditional life insurance may be seen as haram, Islamic insurance models like Takaful offer a halal alternative by promoting values such as cooperation and mutual support.

Uncertainty (gharar)

Uncertainty, or gharar, is one of the three elements that make traditional life insurance haram according to Islamic law. The other two are gambling (maysir) and interest (riba).

Gharar refers to the uncertainty, risk, and deception in a transaction. In the context of life insurance, gharar is present when there is uncertainty about whether the payout will be made, for example, if the insured passes away during the term of the insurance policy. This uncertainty is deemed to be a form of gharar because it puts one's money at undue risk of being lost.

However, some argue that modern insurance policies are less speculative than they seem. Insurance companies conduct due diligence based on the health and history of the insured to ensure that risks are measurable and contained.

Additionally, there are Islamic insurance products that are widely accepted by the community, such as Takaful insurance, cooperative insurance, and term life insurance, which aim to minimise or eliminate uncertainty. Takaful, for example, involves individuals contributing to a shared pool, avoiding "gambling" and uncertainty.

Gambling (maysir)

Gambling, or maysir, is one of the three elements prohibited by Islamic law that are believed to be present in traditional life insurance. The other two are uncertainty (gharar) and interest (riba).

Maysir refers to the gambling element within insurance policies. In term insurance policies, there is no profit element, but if the insured does not die within the term, the insurance vendor profits from the premiums paid in. Islam prohibits gambling and transactions with elements of gambling.

Some Muslims believe that term life insurance policies contain elements of maysir due to the uncertainty relating to the timing of death, benefits, and payout. However, unless a policy contains significant elements of uncertainty and gambling, it is unlikely that maysir fully applies.

Takaful, a form of insurance compliant with Sharia law, is based on principles of cooperation, mutuality, joint interests, and indemnity/debt, solidarity, and common interests. Takaful is seen as a form of social solidarity and is considered halal in Islam.

Interest (riba)

Interest, or riba, is forbidden in Islam. Allah has forbidden all transactions that are based on riba, as well as those that involve deceit.

Riba is a concept that prohibits earning profit from loans or investments that include a specific interest charge. This impacts financial products, particularly those that involve interest-bearing investments.

In the context of life insurance, the challenge arises when examining the standard practices of investment used to grow the fund from which future payouts are drawn. Conventional life insurance policies often rely on interest-bearing investments to grow the funds for payouts, which is incompatible with Islamic ethics. This is why some scholars consider whole life insurance policies to be haram, as they have an investment component.

However, term life insurance may be considered halal by some Islamic financial experts because it is not an investment vehicle. It is simply used as financial protection during the years when a family needs it the most. Term life insurance doesn't earn interest, so it may be a better option than whole life insurance if one wishes to avoid riba.

Takaful as a Shariah-compliant alternative

Takaful is a Shariah-compliant alternative to conventional insurance, which is deemed unacceptable by most Islamic scholars due to its inclusion of haram elements such as riba (interest), gharar (uncertainty), and maysir (gambling). Takaful, on the other hand, is based on Islamic cooperative principles and the concept of tabarru, where contributions are treated as donations rather than payments.

In a Takaful system, people and companies concerned about specific hazards make regular contributions to a shared pool, which is managed by a Takaful operator. This operator charges a fee to cover costs such as sales, marketing, underwriting, and claims management, similar to a conventional insurance company. Claims made by participants are paid out from this shared pool, with any remaining surpluses, after accounting for future claims and reserves, returned to the participants.

The Takaful model is based on several key principles:

• Policyholders cooperate among themselves for their mutual benefit.
• Contributions are considered donations to the fund.
• Every policyholder pays a subscription to help those in need.
• Losses are shared, and liabilities are spread across the community.
• Uncertainty is minimised or eliminated.
• It does not take advantage of others.

Takaful is a popular alternative for Muslims seeking life insurance that aligns with their religious beliefs. While conventional insurance may be seen as a form of gambling, Takaful is based on mutual support and protection, where participants pool their resources to safeguard one another in times of need.

Takaful has grown significantly in recent years, with the industry valued at $24.85 billion in 2020 and projected to reach $97.17 billion by 2030. It is particularly attractive to young Muslims, who make up a significant portion of the global Muslim population.

In summary, Takaful provides a Shariah-compliant alternative to conventional insurance by emphasising cooperation, mutual support, and risk-sharing among participants, while avoiding the haram elements present in traditional insurance policies.

Islamic will as an alternative

Islamic scholars have stated that conventional insurance is not compliant with Sharia law and should not be used by Muslims. This is because it incorporates haram elements such as riba (interest), gharar (uncertainty), and maysir (gambling).

An alternative to conventional insurance is Family Takaful, a form of Islamic insurance based on Sharia law. Takaful is a system of insurance that involves the pooling and investment of funds. It is based on principles of cooperation, mutuality, joint interests, and indemnity/debt, solidarity, and common interests. Policyholders are considered joint investors with the insurance operators, and they share in the pooled monies and any losses.

There are three aspects of mutuality embodied in Takaful: mutual help, mutual responsibility, and mutual protection from losses. When a person joins a Takaful plan, they not only seek protection for themselves but also join forces with other members to help one another in times of need.

Takaful policies cover health, life, and general insurance needs in the same way as conventional insurance. There are different types of Takaful plans, including term plans and lifetime protection plans. Term plans offer coverage for a specific period, while lifetime protection plans provide a fixed death benefit and combine saving (investment) and protection.

Takaful is a viable alternative to conventional insurance for those seeking financial protection that complies with Islamic teachings.

Frequently asked questions