Life Insurance: Haram's Financial Risk And Uncertainty

Life insurance is a contract between an individual and a life insurance company, where the company agrees to pay out a lump sum to the individual's beneficiaries upon their death in exchange for regular premium payments. While Islam does not expressly prohibit life insurance, there are several considerations to be made when choosing a policy that aligns with Islamic law and principles. Traditional life insurance may be considered haram due to three elements forbidden by Islamic law: uncertainty (gharar), gambling (maysir), and interest (riba). However, certain types of life insurance, such as term life insurance and Takaful, are widely accepted by the Muslim community as they address these concerns. Takaful, a form of Islamic insurance, is based on principles of cooperation, mutuality, and shared risk among participants, promoting solidarity within the community.

Uncertainty (gharar)

Uncertainty, or gharar, is one of the three elements prohibited by Islamic law that may be present in traditional life insurance policies, making them haram. Gharar refers to uncertainty, risk, and deception in transactions where there is a speculative element or a degree of uncertainty.

In the context of life insurance, gharar can manifest in a few ways. One concern is that individuals might be paying for something that they will never benefit from, as the policyholder could lose all the sums they have paid if they do not die within the term of the policy. This introduces an element of uncertainty and risk, as the payoff is uncertain and tied to the eventuality of an uncertain event, death.

Additionally, there is a possibility of receiving more money than one has contributed, which can also be seen as uncertain and risky. This uncertainty of death, which is solely in the hands of Allah (SWT), adds a layer of gharar to term life insurance policies.

However, it is important to note that whole life insurance policies, or life assurance policies, are generally deemed compliant with Sharia laws as there is no element of risk or uncertainty, given that a payout is guaranteed upon death.

To avoid the issue of gharar, Muslims seeking life insurance can opt for policies that follow Islamic principles, such as Takaful insurance. Takaful eliminates uncertainty by having people come together to share their risks and contribute to a shared pool. This way, individuals are either protected from financial loss or contribute to helping others in need, reducing the speculative nature of traditional life insurance.

Gambling (maysir)

Some Muslims believe that term life insurance policies contain elements of maysir due to the uncertainty relating to the timing of death, benefits, and pay-out. However, unless a policy contains significant elements of uncertainty and gambling, it is unlikely that maysir fully applies. Ultimately, the responsibility lies with the person looking for the insurance policy to ensure that it does not contravene any Islamic laws or rules.

Takaful, a form of Shariah-compliant insurance, avoids maysir by having everyone contribute to a shared pool. This way, it doesn't involve gambling or making money from uncertainty. Takaful is based on values like cooperation and mutual support, which are in line with Islamic teachings.

Interest (riba)

Whole life insurance policies are generally considered haram because most involve an investment component, which is forbidden by Islamic principles. Policyholders would technically be participating in riba.

Term life insurance, on the other hand, is considered compliant with Sharia laws by some in the Muslim community because it is not an investment vehicle. Term policies are used as financial protection during the years when a family needs it the most.

Takaful is another form of Sharia-compliant insurance. Takaful policies are based on people coming together to help each other and share their risks. Everyone contributes to a shared pool, and this way, it doesn't involve riba.

Muslims looking for insurance policies that comply with Sharia laws should ensure that elements of interest are not present in the insurance products they invest in.

Deceit

Life insurance is considered deceitful and thus haram in Islam because it involves gharar (buying/selling something where it is uncertain whether what is being bought/sold will be delivered) and riba (usury, interest).

Allah has forbidden all transactions that are based on riba and deceit, as mentioned in the Qur'an:

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

In addition, it was narrated in a sahih report that the Prophet (peace and blessings of Allah be upon him) forbade deceit.

Shaykh Ibn Baz (may Allah have mercy on him), when asked about life insurance, stated that it is haram and not permitted because of the involvement of gharar and riba.

However, some Islamic scholars argue that life insurance is permissible if it is set up in a specific way to avoid uncertainty and interest. Term life insurance, for example, may be considered halal by some scholars because it is not an investment vehicle and does not earn interest.

Takaful, a form of Islamic insurance, is also considered permissible by many scholars as it embodies the spirit of caring within Islam. It involves policyholders pooling premiums together to support one another, and the funds are invested in Shariah-compliant assets.

Takaful as a Shariah-compliant alternative

Takaful is a Shariah-compliant alternative to conventional insurance, which is believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty). Takaful is a co-operative system of reimbursement or repayment in case of loss, with people and companies contributing money to a shared pool to guarantee each other against loss or damage. It is based on the Islamic religious law of Sharia, which explains how individuals are responsible for cooperating and protecting one another.

Takaful insurance companies were introduced as an alternative to commercial insurance companies, and the global Takaful insurance market was valued at $24.85 billion in 2020, projected to reach $97.17 billion by 2030. Takaful policies cover health, life, and general insurance needs, and any claims made by participants are paid out of the Takaful fund.

The key principles of Takaful are as follows:

• Policyholders cooperate among themselves for their common good.
• Policyholders' contributions are considered donations to the fund (pool).
• Every policyholder pays a subscription to help those who need assistance.
• Losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated concerning subscription and compensation.
• It does not derive advantage at the cost of others.

Takaful is based on three aspects of mutuality: 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.

There are several models of how Takaful can be implemented, including the Mudharabah model (profit-sharing), the Tabarru'-based model (where "donations" are accumulated into a fund to meet members' losses), and a combination of the two. Another model is the Wakala model, where an agency fee is received upfront from contributors and transferred to a shareholders fund.

Takaful is a unique form of insurance that follows Islamic principles, making it different from other types of insurance. It is designed to provide financial protection for individuals and their families while aligning with Islamic teachings.

Frequently asked questions