Life Insurance In Islam: Halal Or Haram?

Life insurance is a complex issue in Islam, and while it is not expressly prohibited, there are several factors to consider when determining if a specific policy is permissible. Traditional life insurance policies may be deemed haram due to the presence of three elements forbidden by Islamic law: uncertainty (gharar), gambling (maysir), and interest (riba). However, some scholars argue that term life insurance might be considered halal as it does not include an investment component, thus avoiding the issue of riba. Takaful, a form of Sharia-compliant insurance, is also widely accepted in the Muslim community as it is based on principles of cooperation, mutuality, and shared risk among participants. Ultimately, the permissibility of term life insurance in Islam depends on the specific policy and its adherence to Islamic laws and principles.

Uncertainty (gharar)

Uncertainty, or gharar, is a central concept in Islam that is associated with deception and risk. The term originates from the Arabic word for "uncertainty, hazard, chance, or risk". Gharar is prohibited in Islam because it goes against the principle of certainty and transparency in business dealings.

Gharar can arise when the ownership of goods is unclear or uncertain. For example, selling crops that have not yet been harvested or fish that have not yet been caught would constitute gharar. In modern finance, gharar can be observed in derivative transactions such as futures and options contracts, which have future delivery dates.

Islamic scholars differentiate between minor and substantial gharar. While most derivative products are prohibited due to excessive uncertainty, other practices considered gharar, such as commercial insurance, are accepted as necessary parts of economic life.

In the context of life insurance, gharar refers to the uncertainty surrounding the payout. In term life insurance policies, there is a level of uncertainty regarding whether the payout will be made, as it depends on whether the insured person passes away during the term of the insurance. This uncertainty has led to debates about whether term life insurance policies contain elements of gharar that make them non-Islamic.

However, it is important to note that Islam has permitted some gharar in transactions that provide significant benefits. Additionally, modern insurance policies are less speculative than they may seem, as insurance companies conduct thorough due diligence to assess risks.

To ensure compliance with Islamic principles, Muslims seeking life insurance policies should choose those based on the concept of takaful, which emphasises cooperative and charitable ventures. Takaful is considered halal and provides financial protection alongside long-term savings.

Gambling (maysir)

Gambling, or maysir, is strictly forbidden in Islam. The Arabic term maysir means 'getting something too easily' or 'getting a profit without working for it'. Maysir is considered a game of chance, where a person either wins or loses.

The Quran states that games of chance, including maysir, are a "grave sin" and abominations of Satan's handiwork. The Quran specifically mentions maysir in the following verses:

> "They question thee about strong drink and games of chance. Say: In both is great sin, and (some) utility for men; but the sin of them is greater than their usefulness." Surah Al Baqarah Ayah No. 219!

> "O ye who believe! Strong drink and games of chance and idols and divining arrows are only an infamy of Satan's handiwork. Leave it aside in order that ye may succeed. Satan seeketh only to cast among you enmity and hatred by means of strong drink and games of chance, and to turn you from remembrance of Allah and from (His) worship. Will ye then have done?" Surah Al Maidah Ayah No. 90 & 91!

The Prophet Muhammad (PBUH) also forbade maysir, as narrated in the hadith:

> "The Prophet Mohammad (PBUH) forbade wine (Khamr), the game of chance (Maisir), drum (Kubah) and wine made from millet (Ghubairah) saying: Every intoxicant is forbidden."

Maysir is prohibited by Islamic law because it is based on immoral inducement, where participants are enticed by wishful hopes of gaining something by mere chance, without considering the possibility of loss. This form of gambling is considered to have several harmful effects, including economic instability, deterioration of personal character, destruction of family relationships, neglect of responsibilities, social inequality, and mental health issues.

In the context of Islamic banking and finance, maysir refers to contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain future event. This includes lotteries, lotto, casino games, and betting on animal races. These types of transactions are considered high risk, as some people win large sums of money, while others suffer losses or even bankruptcy, potentially leading to greater financial and societal problems.

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.

> “…whereas Allah has permitted trading and forbidden riba” [al-Baqarah 2:275]

Riba usually comes into play in endowment insurance policies that promise guaranteed payments. In these cases, the insurance funds are often invested in financial products and businesses that may contain elements of riba.

Term life insurance might be halal, depending on the specific policy, because there is no investment component (and therefore no interest).

Takaful insurance

Takaful is a form of Islamic insurance that is compliant with Sharia law. It is based on the principles of cooperation, mutuality, joint interests, and indemnity/debt, solidarity, and common interests. Takaful insurance companies were introduced as an alternative to commercial insurance, which is believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty).

In a takaful system, members contribute money to a pool that is used to guarantee each other against loss or damage. The vendors and policyholders share the pooled money and any losses. There is no guarantee of a positive return on investment, and there are no definite and fixed profits. Takaful policies cover health, life, and general insurance needs.

Any claims made by participants are paid out of the takaful fund, and any remaining surpluses, after making provisions for future claims and other reserves, are returned to the participants in the fund. An Islamic insurance company operating a takaful fund must follow certain principles, including operating according to Islamic cooperative principles and maintaining two separate funds: a participant and policyholder fund, and a shareholder fund.

Whole life insurance

Some Muslims may question whether whole life insurance contains elements of maysir (gambling) due to the uncertainty relating to the timing of death and payout. However, unless a policy contains significant elements of uncertainty and gambling, it is unlikely that maysir is applicable. Ultimately, the responsibility falls on the individual seeking the insurance policy to ensure it adheres to Islamic laws and rules.

Muslims seeking Sharia-compliant whole life insurance policies should ensure that the following elements are absent:

• Interest or riba
• Gambling
• Uncertainty or gharar

Frequently asked questions