Life Insurance In Islam: Halal Or Haram?

Life insurance is a contentious issue in Islam, with some arguing that it is 'haram' (forbidden) and others deeming it 'halal' (permissible). The key points of contention are uncertainty, interest, and deceit. Traditional life insurance may be seen as haram because of three elements prohibited by Islamic law: uncertainty (gharar), gambling (maysir) and interest (riba). However, some argue that life insurance is a form of financial planning and responsibility, which aligns with Islamic teachings.

Is Takaful insurance compliant with Islamic law?

Takaful is a type of Islamic insurance that complies with Sharia law. It is based on the idea of a cooperative system of reimbursement or repayment in case of loss, organised as an alternative to conventional insurance, which is believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty).

In Takaful, members contribute money to a shared pool, which is used to guarantee each other against loss or damage. This is managed by a Takaful operator, who charges a fee to cover costs. Claims made by participants are paid out of the Takaful fund, with any remaining surpluses belonging to the participants.

Takaful insurance covers health, life, and general insurance needs. It is based on the principles of cooperation, mutuality, joint interests, 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 is no guarantee of a positive return on investment, and no element of definite and fixed profits.

Takaful has been approved by Muslim scholars and is seen as a legitimate form of business. It is different from conventional insurance in that it is based on the cooperative principle and the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful fund and operations to the policyholders.

The key differences between Takaful and conventional insurance are in the way risk is assessed and handled, and how the Takaful fund is managed. In Takaful, the policyholders benefit from the profits generated, whereas in conventional insurance, it is the shareholders who benefit.

What is considered haram in Islam?

The Arabic term 'haram' refers to something forbidden by Allah and is one of the five Islamic commandments that define the morality of human action. Haram is used to describe any act that is forbidden in the religious texts of the Quran and the sunnah.

There are two types of haram:

• Al-haram li-ḏātihi: prohibited because of its essence and the harm it causes to an individual, including adultery, murder, and theft.
• Al-haram li-ġayrihi: prohibited because of external reasons that are associated with something forbidden, such as ill-gotten wealth obtained through sin, or any means that involve harm to another human being.

• Riba (usury, interest)
• Alcohol and pork consumption
• Gambling
• Music with instruments
• Un-Islamic decor, such as statues
• Toys that resemble living things
• Art that resembles humans
• Adoption
• Playing games of chance or that depend on luck, as it goes against Allah's predetermined fate
• Interest-bearing debt
• Reading and writing about ideas outside the realm of Islam
• Owning pets other than cats
• Non-Islamic clothing, such as jeans and t-shirts
• Subcultures such as punk, metal, and goth
• Eating or washing with the left hand
• Imitating non-Muslims in certain practices, such as plucking eyebrows
• Working in non-Islamic establishments, such as restaurants, casinos, temples, and bars
• Befriending non-Muslims and addressing them as "brothers" or "sisters"
• Premarital relationships
• Interactions between unmarried men and women, including talking, showing affection, and staring
• Not praying five times a day
• Failing to perform Wu'Du (ritual ablution) before praying or reading the Quran
• Homosexuality and associating with homosexual individuals
• Leaving the Islamic religion or interacting with those who have left
• Interacting with people outside the Abrahamic religions
• Marrying a slave or certain relatives, such as a step-brother or step-sister who was breastfed by the same mother
• Slaughtering an animal without saying 'Bismillah' (in the name of God)
• Stunning an animal before slitting its throat
• Consuming non-halal food
• Men wearing gold jewellery, shaving their beards too short, or having long moustaches
• Women showing their hair or skin, talking to men other than their husbands, refusing sex, going outside without their husband's consent, wearing jewellery, makeup, or perfume in public, or arguing with their husbands
• Women praying with men or being in the company of men who are not their husbands or immediate relatives

What are the types of life insurance?

There are two main types of life insurance: term life and permanent life. Within these broad categories, there are several subtypes of life insurance to choose from. Here is a list of the most common types of life insurance:

Whole Life Insurance

Whole life insurance is a permanent life insurance policy that lasts your entire life as long as you keep up with premium payments. It is the closest thing to "set it and forget it" life insurance. Whole life insurance policies guarantee a payout to your family when you die and are relatively simple compared to other permanent life insurance options. However, they tend to be more expensive than term life insurance.

Universal Life Insurance

Universal life insurance is a permanent life insurance policy that allows you to adjust your premiums and has a cash value component that grows based on market interest rates. Universal life insurance is typically less expensive than whole life insurance and can adapt to your changing needs. However, the death benefit and cash value growth are not guaranteed.

Variable Life Insurance

Variable life insurance is a permanent life insurance policy tied to investment accounts such as bonds and mutual funds. It offers the potential for considerable gains if your investment choices perform well. However, it requires hands-on management as the cash value can change daily based on market performance.

Term Life Insurance

Term life insurance is a temporary life insurance policy typically sold in lengths of one, five, 10, 15, 20, 25, or 30 years. It is a simple, low-cost policy that aims to replace your income when you die. Term life insurance is usually the cheapest option and is sufficient for most people. However, if you outlive your policy, your beneficiaries will not receive a payout.

Burial Insurance or Final Expense Insurance

Burial insurance, also known as final expense insurance, is a small whole life insurance policy that covers funeral, burial, and other end-of-life expenses. It does not require a medical exam, making it accessible to seniors with pre-existing health conditions. However, coverage amounts are typically capped at lower amounts.

Joint Life Insurance

Joint life insurance insures two lives, usually spouses, under one policy. There are two types: first-to-die, which pays out after the first policyholder dies, and second-to-die, which pays out after both policyholders die. Joint life insurance is often used for estate planning when the life insurance money is not needed until both insured individuals have passed away.

Mortgage Life Insurance

Mortgage life insurance covers only the balance of your mortgage and pays out to the lender, not your family, in the event of your death. It is designed for those who want to ensure their family is not burdened by the mortgage if they pass away.

Credit Life Insurance

Credit life insurance pays off a specific loan, such as a home equity loan, in the event of your death. It is often offered by lenders when you take out a loan, and the payments can be rolled into your loan payments. However, it does not provide financial flexibility for your family as the payout goes directly to the lender.

Supplemental Life Insurance

Supplemental life insurance, also known as group life insurance, is typically offered by employers as part of their workplace benefits. It is usually free or low cost and provides supplementary coverage to your individual life insurance policy. However, if you lose your job, you generally lose this type of life insurance.

What are the arguments against life insurance?

There are several arguments against life insurance from an Islamic perspective. Here are some of the key points:

Uncertainty (Gharar)

Uncertainty or Gharar is one of the primary arguments against life insurance in Islam. This refers to the uncertainty of whether the insured will benefit from the policy or if the payout will be made, as no one can predict death with certainty. This element of risk and uncertainty is considered unacceptable in Islamic finance.

Gambling (Maysir)

Some scholars argue that life insurance contains elements of gambling, which is prohibited in Islam. In term life insurance policies, there is uncertainty about whether the insured will die within the policy term. If they do not, the insurance company profits from the premiums paid without providing any benefit in return, which can be seen as a form of gambling.

Interest (Riba)

Life insurance policies that require the insured to pay premiums on a monthly or annual basis may involve the payment of interest, which is forbidden in Islam. This is another key reason why some Muslims consider life insurance to be haram.

Encroaching on the Domain of Allah

By taking out life insurance, it is argued that individuals are encroaching on matters that are solely in the hands of Allah. The Quran states that Allah is responsible for life, death, and providing sustenance. Therefore, taking out insurance that seeks to insure against the loss of life and the sustenance of one's family can be seen as going against Allah's will.

Deceit

Life insurance is also argued to involve deceit, which is forbidden in Islam. This is because the insured may pay premiums for a significant period without knowing whether the benefits will ever be realised, putting their money at risk of being lost.

How does life insurance differ from gambling?

Life insurance is often compared to gambling because both involve an element of uncertainty about future events. However, there are several key differences between the two.

Firstly, life insurance is not just a wager on the timing of one's death but also provides financial protection for loved ones in the event of an insured person's death. This aspect of risk mitigation is absent in gambling, where the primary objective is to win money or prizes.

Secondly, life insurance policies are typically long-term commitments that require regular premium payments to maintain coverage. In contrast, gambling involves placing bets on specific events or outcomes, and the risk and potential payout are usually immediate.

Thirdly, life insurance policies are designed to provide peace of mind and financial security for individuals and their families. In contrast, gambling is often associated with risk-taking and the potential for significant financial loss.

Additionally, life insurance policies are subject to regulatory frameworks and consumer protections that ensure fairness and transparency. Gambling, on the other hand, is heavily regulated and may be prohibited or restricted in many places.

Furthermore, life insurance policies are underwritten based on careful analysis of risks and probabilities, while gambling odds are often stacked in favour of the house or bookmaker.

Lastly, life insurance can be seen as a form of risk management and long-term financial planning, whereas gambling is typically viewed as a form of entertainment or speculation.

In conclusion, while both life insurance and gambling involve uncertainty, they differ significantly in their purpose, structure, and overall impact on individuals and society.

Frequently asked questions