Understanding Islamic Insurance (Takaful): Key Differences from Conventional Insurance #
Original Question: My friend recommended me to opt for “Islamic insurance” instead of conventional insurance. I wonder, whether there is such a product referred to as “Islamic insurance”? How does it differ from conventional insurance?
Shariah scholars have strived to formulate “Islamic insurance”, also known as “takaful” products. These Islamic insurance products serve to provide an al-Makhraj (legal exit) and halal alternative insurance that is free from prohibited elements such as gharar (ambiguity), maysir (gambling) and riba (interest).
Despite some similarities, there are fundamental differences, including the underlying ‘aqad (contract). The contract concluded in the conventional insurance between the insurer (insurance company), and the insured (policy owner) reflects a “buy and sell” agreement, whereby the insured pays a premium to the insurer. In exchange, the insurer will compensate the insured for uncertain occurrence(s) of certain events. Here comes the elements of gharar (ambiguity) and maysir (gambling), in which either one party may suffer loss (zero-sum game).
On the other hand, in takaful, the contract is based on tabarru’ (voluntary contribution), whereby the participants mutually agree to contribute to the tabarru’ fund, which will be used to help any participants when needed, in the spirit of mutual assistance. This is an example of a “win-win situation” as opposed to the “win-lose situation” in gambling. The risk is shared between the takaful participants and not transferred to the insurer as in the conventional insurance.
Apart from that, some takaful products may involve mudarabah (profit sharing between rabbul mal and mudarib) contracts too. Part of the contributions made by the takaful participants will be invested in Shariah-compliant investments with the aim of maximising the profit and giving more benefits to the takaful participants. The takaful operator will be acting as the mudarib (fund manager), who manages the funds contributed by the rabbul mal (capital provider), who are also the takaful participants.
Most importantly, there are knowledgeable and credible Shariah scholars supervising the takaful operators/companies and ensuring the Shariah compliancy of its operations and investment portfolio. In contrast, conventional insurance companies are not restricted to invest in interest-bearing assets and other Shariah non-compliant investments. In Singapore, there are currently no “fully” takaful products or operators available.
What is available for the community are investment linked policies with shariah-compliant funds (Franklin Templeton Investment funds, NTUC Takaful fund and HSBC Islamic Equity Index).Despite the circumstances of no fully halal option available and a need for insurance protection, we should strive to minimise our engagement with non-compliant conventional products as much as possible.
Nonetheless, the best alternative at the moment on life insurance for us Muslims in Singapore is term policies or Investment-linked policies with Shariah-compliant funds as compared to Whole life or endowment that focus more on protection.
