Term Life Insurance: Halal Or Haram?

Life insurance is a contentious issue in the Islamic faith. While some scholars argue that it is 'haram' (forbidden) because it involves deceit, others argue that it is 'halal' (permissible) to ensure a family's financial security. Term life insurance is a type of insurance that covers lost income if the insured dies within a specified time period. This article will explore the arguments for and against term life insurance being considered halal in Islam.

Is term life insurance haram?

Term life insurance is a protective insurance policy that covers lost income when the insured dies, including costs such as mortgage payments. It is a form of insurance that is typically valid for a specified time period, during which the insured pays monthly premiums to the insurance company. If the insured dies during this time, their beneficiaries will receive a payout.

There is debate among Islamic scholars about whether term life insurance is considered haram or halal. Some scholars argue that term life insurance is haram because it involves gharar (uncertainty), maysir (gambling), and riba (interest), which are all deemed haram in Islam.

However, other leading scholars, including Mustafa Ahmad Al-Zarqa, Abdelwahab Khallaf, and Monzer Kahf, argue that term life insurance is permissible for Muslim-Americans due to the necessity and need to protect one's family. They emphasize that Islam permits ensuring a family's financial security through term life insurance.

Additionally, some sources argue that the type of gharar forbidden in Islam is not the same as the type of gharar involved in modern insurance. They also highlight the positive impact of insurance, arguing that the benefits outweigh the negatives. Furthermore, they contend that if takaful (a form of Islamic insurance compliant with Sharia law) is considered Shariah-compliant, then conventional insurance should also be accepted as such, given the lack of substantial differences between the two.

In conclusion, while there are differing opinions among Islamic scholars, those in favor of term life insurance for Muslims emphasize the importance of protecting one's family and argue that it does not contradict Islamic teachings.

What is the Islamic perspective on whole life insurance?

Islamic scholars have differing opinions on the permissibility of life insurance. Some believe that life insurance is haram because it involves riba (interest), gharar (uncertainty), and maysir (gambling), which are forbidden in Islam. On the other hand, others argue that life insurance is permissible if it adheres to Islamic principles and is structured to avoid riba and gharar.

Whole life insurance is a type of insurance policy that guarantees a payout to the policyholder's family upon their death. It is considered a form of investment, and its permissibility depends on the underlying assets in which the funds are invested. In the Middle East, Muslims can opt for a takaful operator, who will invest only in halal assets. However, in countries like the UK, it is challenging to find policies that align with Islamic principles due to the prevalence of interest-based products.

To ensure compliance with Islamic laws, Muslims seeking whole life insurance in Western countries may consider two approaches. The first option is to choose a policy that allows them to dictate the underlying investments, selecting only Shariah-compliant assets. The second option is to choose a policy with largely Shariah-compliant underlying assets and donate the non-compliant portion as charity. However, this latter option may not be ideal as whole life insurance is not as crucial as other types of insurance.

Muslims considering life insurance should carefully examine the contractual terms and compare them with Islamic principles. Policies that align with the concept of takaful, or Islamic insurance, are generally deemed permissible. Takaful is based on principles of cooperation, mutuality, joint interests, and indemnity. Policyholders are considered joint investors with the insurance operators, sharing profits and losses without guaranteeing positive returns.

When evaluating life insurance policies, Muslims should be cautious about elements of gharar, riba, and maysir, which are prohibited in Islamic contracts. Gharar refers to uncertainty, risk, and deception, while riba denotes interest, and maysir represents the gambling element within insurance policies. By avoiding these elements and adhering to Shariah-compliant investments, Muslims can ensure their financial protection and long-term savings while remaining aligned with their religious beliefs.

What is Takaful?

Takaful is a form of Islamic insurance based on values of social solidarity and cooperation. It is derived from the Sharia or Islamic religious law, which explains how individuals are responsible for cooperating and protecting one another. Takaful policies cover health, life, and general insurance needs.

Takaful insurance companies were introduced as an alternative to those in the commercial insurance industry, which are believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles—all of which are outlawed in Sharia law.

In Takaful, members contribute money into a pool system to guarantee each other against loss or damage. This is known as a takaful fund, and it is managed and administered on behalf of the participants by a takaful operator, who charges a fee to cover costs.

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:

• It must operate according to Islamic cooperative principles.
• A reinsurance commission may only be received from or paid out to other Islamic insurance and reinsurance companies.
• The insurance company must maintain two separate funds: a participant and policyholder fund, and a shareholder fund.

Takaful is considered a form of social solidarity and is based on principles of cooperation and trustees that safeguard the position of each person who has pooled their funds.

What is the difference between life insurance and life assurance?

Life insurance and life assurance are terms that are often used interchangeably, but there is a difference between the two. Both are forms of protection designed to pay out a sum of money to beneficiaries after the policyholder passes away. However, life insurance covers the policyholder for a specific term, whereas life assurance covers the policyholder for their entire life.

Life Insurance

Life insurance is designed to cover the policyholder for a specific term, often the same amount of time as a mortgage. The policyholder pays a premium for the term of the policy and is covered if they pass away during that term. There are three different types of term life insurance products: pension term protection, convertible term life insurance, and term life insurance. The most common types of life insurance are level, increasing, and decreasing cover. Level cover provides the same amount of cover for the whole term of the policy, while increasing cover accounts for inflation, and decreasing cover accounts for the fact that the policyholder has likely paid off more of their mortgage or other loans.

Life Assurance

Life assurance mixes investment and insurance. It pays out either a guaranteed minimum or its investment valuation, including accumulated annual bonuses from the life assurance company, when the policy is redeemed. Life assurance policies are designed to produce long-term, tax-efficient capital growth. Life assurance is also known as 'whole of life' cover, and because death is a certainty, a payout is guaranteed. This means that premiums for life assurance policies are typically higher than for life insurance policies.

What are the arguments against life insurance?

Arguments Against Life Insurance

There are several reasons why some Muslims believe that life insurance is haram (forbidden by Islamic law).

Firstly, the idea that Allah is responsible for life, death, and providing for his people is central to the Islamic faith. By taking out a life insurance policy, some believe that one is interfering with Allah's domain.

Secondly, life insurance policies are considered 'uncertain' in Islamic faith as a payout is not guaranteed. With term life insurance, a payout is only made to loved ones if the insured passes away during the term. As it cannot be predicted whether this will happen or not, there is a level of uncertainty, which can be seen as a form of gharar (uncertainty or deception).

Thirdly, the element of uncertainty in term life insurance policies can also be seen as a form of maysir (gambling). In the case of term life insurance, if the insured does not die within the term, the insurance company profits from the premiums paid without having to pay out.

Fourthly, the issue of riba (usury or interest) is also present in life insurance policies. Life insurance companies invest the premiums from clients into interest-based investments. As the amount that beneficiaries would receive after the death of the insured is sourced from interest-based investments, the policies do not meet the standards of Shariah law.

Finally, some argue that life insurance involves deceit and is therefore haram. This is because it involves gharar (buying/selling something where it is uncertain whether what is being bought/sold will be achieved/delivered) and riba (usury or interest).

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