Life Insurance Sales: Halal Or Haram?

Life insurance is a contentious issue in Islam, with some arguing that it is haram (prohibited) and others deeming it halal (permissible). The debate centres around the compatibility of insurance with Islamic laws and principles, specifically those of takaful, gharar, riba, and maysir. Takaful is a form of insurance compliant with Sharia law, based on cooperation, mutuality, and shared investment and losses. While some argue that life insurance with takaful is halal, others point to elements of gharar (uncertainty, risk, deception), riba (interest), and maysir (gambling) in insurance policies, which are prohibited in Islam. Ultimately, the decision rests with the individual, who must ensure their insurance policy does not contravene Islamic laws and rules.

Life insurance is haram because it involves gharar (buying/selling with uncertainty) and riba (usury/interest)

Life insurance is considered haram in Islam because it involves gharar (buying/selling with uncertainty) and riba (usury/interest).

Gharar refers to the uncertainty in buying and selling, where it is unclear whether what is being bought or sold will be achieved or delivered, and in what quantity. In the case of life insurance, there is uncertainty about whether the insured event will occur and whether the insured person will benefit from the policy. This puts the insured person's money at risk of being lost.

Riba, on the other hand, refers to usury or interest. In the context of life insurance, riba is considered haram because insurance companies take people's money and promise to pay them more or less in the event of an accident or incident. This is seen as a form of interest, which is prohibited in Islam.

According to Shaykh Ibn Baz, "Insurance of one's life or possessions is haram and is not permitted because it involves gharar and riba."

The Quran also supports this view, with Allah stating:

> "...whereas Allah has permitted trading and forbidden riba" [al-Baqarah 2:275]

Furthermore, it is narrated in a sahih report that the Prophet forbade deceit, which is inherent in the uncertainty and interest involved in life insurance.

While some scholars argue that certain types of insurance, such as Takaful, may be permissible, traditional life insurance with investment components is generally considered haram due to the presence of gharar and riba.

Allah has forbidden all transactions that are based on riba

Riba is specifically prohibited in several verses of the Quran, including 2:275-280, 3:130, 4:161, and 30:39. These verses make it clear that Allah has permitted trading but has forbidden riba. The Prophet Muhammad also forbade deceit, which is another element of riba.

Riba is seen as a form of usury or interest, which is deemed to be exploitative and against the principles of Islam. It is considered both illegal and unethical, and Islamic banking has provided workarounds such as profit-sharing systems where borrowers agree to return a portion of their profits as payment for the loan.

There are two main forms of riba: riba al-nasiya, which refers to the interest or increase on a loan of cash; and riba al-fadl, which refers to the simultaneous exchange of unequal quantities or qualities of a commodity.

The prohibition of riba is based on the idea that it is a mechanism that empowers individuals or groups to institutionalize their wealth and perpetually impoverish the disempowered. Allah has classified loans as a category of charity, which must be given freely to help those in need. Charging interest on loans is seen as immoral and corrupt in the Islamic faith.

The Prophet Muhammad also spoke about riba in frightening terms, ranking it as one of the seven major sins in Islam. He is quoted as saying, "A single coin of riba that a man receives knowingly is worse than committing adultery thirty-six times."

Insurance is the sale of money for money of a greater or lesser amount with a delay in one of the payments

Life insurance is considered haram in Islam because it involves deceit and is a form of riba (usury or interest). Insurance is the sale of money for money of a greater or lesser amount with a delay in one of the payments. This is based on the premise that insurance companies take people's money and promise to pay them more or less when an accident happens.

Shaykh Ibn Baz (may Allah have mercy on him) was asked about life insurance and he said:

> Insurance of one's life or possessions is haram and is not permitted, because it involves gharar (buying/selling something where it is not known whether what is being bought/sold will actually be achieved/delivered, or in what specific quantity, thus putting one's money at undue risk of being lost) and riba (usury, interest).

Allah has forbidden all transactions that are based on riba, and all transactions that involve deceit, as a mercy to this ummah, and to protect them from that which may harm them. In the Holy Quran, Allah (SWA) has said:

> “Allah has permitted trading and forbidden riba” (Surah Al Baqarah v.275)

The Prophet of Allah (Sallallahu Alahi Wasalam) has cursed the person who takes interest, who gives interest, and who writes it and who witnesses it.

However, some scholars argue that insurance is not haram. They argue that insurance is not a product but a program, and therefore the concept of gharar does not apply. They also argue that insurance is not gambling because it is not a matter of paying something for the hope of getting more. Instead, they argue that insurance is a program that collects money from each person and if someone needs help, that money goes to help such a person.

Takaful is a form of insurance that is compliant with Sharia law principles

Takaful is a form of insurance that complies with Sharia law. It is based on the concept of shared responsibility and cooperation among a community of members, who contribute money to a pooled fund that is used to guarantee each other against loss or damage. Takaful is derived from the Arabic word "Kafalah", which means "guaranteeing each other" or "joint guarantee". This system is rooted in the Islamic principle of "bear ye one another's burden".

Takaful insurance companies were introduced as an alternative to commercial insurance, which is believed to violate Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty). In Takaful, members' contributions are considered donations, and any claims made are paid out of the collective fund. Any remaining surpluses, after accounting for future claims and other reserves, are returned to the participants instead of the operator, ensuring that the operator does not profit from interest.

Takaful policies cover health, life, and general insurance needs. Takaful operators charge a fee to cover their costs, which may include sales, marketing, underwriting, and claims management. This fee-based structure ensures that Takaful operators do not profit from gharar (fraudulent transactions with uncertain terms) or riba (usury or interest).

The key differences between Takaful and conventional insurance lie in the assessment and handling of risk, the management of the fund, and the relationship between the operator and the participants. Takaful is based on cooperative and mutual principles, with policyholders as joint investors with the operator, who acts as their agent.

Takaful has been praised for providing superior alternatives to conventional insurance that promote human capital, personal dignity, community self-help, and economic self-development while adhering to Sharia law.

Whole life insurance is deemed compliant with Sharia law as there is no element of risk or uncertainty

Whole life insurance is often deemed haram in Islam because most whole life policies have an investment component, which is forbidden by Islamic principles. This is because policyholders would technically be participating in gambling and making money from uncertainty. However, there is an exception for whole life insurance policies that are compliant with Sharia law.

Sharia-compliant whole life insurance is based on the same community principle as the origins of insurance: the losses of the few are met by the contributions of the many. This type of insurance is called Takaful, a special kind of insurance that follows Islamic principles and is different from other types of insurance. Takaful policies cover health, life, and other general insurance needs, but they work by having people come together to help each other and share their risks. Everyone contributes to a shared pool of funds, and this way, Takaful avoids "gambling" and uncertainty.

In a Takaful insurance fund, the concepts of community and charity are paramount. Policyholders are understood to be members of the fund's community, and each member "donates" money to the fund, with no expectation of repayment. If a member of the fund suffers a loss, those donations are used to restore them to their original condition. Takaful is deemed compliant with Sharia law as there is no element of risk or uncertainty.

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