Life Insurance and Family Takaful

Muslim jurists and Shari’ah scholars have objected to life insurance schemes as life and death is ordained by Allah and cannot be insured. Further, conventional life insurance policies usually involve Riba, Gharar, and Maysir which are prohibited in Islam. In case of conventional insurance, the objections are justified. Insurance is a necessity of modern life and a Shari’ah compliant alternative, similar to Islamic banking products, had to be developed. The Family Takaful which is an Islamic form of life insurance does not insure life. It actually provides protection to those who are dependent on a person against hardship in case of untimely death of the individual. This Islamic form of insurance is free from prohibited Riba, Gharar, and Maysir. The beneficiary is usually not lone beneficiary, but rather a trustee whose duty is to distribute the received benefits according to the Islamic laws of inheritance and the will of the deceased. Family Takaful serves an opportunity for the individuals to accumulate savings while providing collective protection for the participants’ dependents in case of untimely death.

A life insurance policy almost always involves the prohibited Riba since premium is usually invested by the insurance companies in interest bearing instruments. Further, in case of death of the insured person, the beneficiaries could receive much more than the premiums paid. This also constitutes Riba. Conversely, Family Takaful premiums are invested in Mudarabah type schemes which are free of Riba.

The other objection applicable to life insurance is Maysir (gambling) and Gharar (uncertainty). When a policyholder buys a policy both insurer and insured are gambling on the life of the insured to see who gains the most financially. There is also undue uncertainty in life insurance as premiums are paid for an event for which timing and occurrence is unknown. If the policyholder dies early then his dependents receive the large benefits. On the other hand, if he lives a long life, the insurance company collects large amounts of premiums over the years. Family Takaful is based on the cooperative principle to help a needy family in case of untimely demise of a person. They receive all the premium paid, bonuses, dividends, and a donation amount based on their financial need. If the policy holder lives through the term of the policy, he gets back his paid premiums, dividends and Mudarabah bonuses.

In conventional insurance any one can purchase life insurance in any amount he or she can afford, for himself or for anyone else in whom he or she has insurable interest. In the event of death of the insured, the beneficiary gets to collect the policy amount. Shari’ah scholars object to having a beneficiary claiming the whole amount. In Family Takaful, the beneficiary is only acting as a trustee and upon receiving the benefits he is supposed to distribute it to the dependents, lenders, or other claimants according to Shari’ah guidelines.

In summary, the objections of Shari’ah scholars on conventional life insurance are valid. Family Takaful takes a more rational approach for the benefit of survivors and the society. It provides financial support for the family of a deceased person in line with Islamic teachings. This also safeguards against general poverty in the society by protecting women and children who might become widows and orphans and be dependent on the state or on the charity of others. It also develops the spirit of cooperation and support among the participants by pooling their resources for the collective good.

Family Takaful plans have evolved to provide an Islamic alternative to traditional insurance in line with Shari’ah principles. These are long term savings plans which benefit the individual by accumulating savings and enjoying the investment return. They promote the spirit of mutual cooperation among the contributors by providing financial assistance to the survivors in case of untimely death or unfortunate events. The beneficiaries do not become dependent on the state or on charity thus supporting the strength of the economy. The plans also help the economy by providing needed capital for the growth of the economy.

Family Takaful plans encourage the participants to save by paying contributions to the plan. A part the savings are invested in profit making ventures to gain financial rewards. In case of death of a participant, beneficiaries get Takaful benefits based on the policy to lessen the financial effect of the loss. In some tax jurisdictions, there may be tax reductions for the contributor for the monies paid into a Family Takaful scheme.

The Takaful plans are of defined maturity. The participants make periodic contributions to achieve their individual financial goals and also to help a bereaved family in case of death of a participant. The beneficiaries of a policy are not expected to make undue financial gains which go against the cooperative and mutual help principle of Takaful or somehow harm the other participants. The beneficiary cannot claim the entire benefit for himself or herself. Rather, he or she should act as a trustee and distribute the benefit among the heirs according to the Islamic principles of inheritance. This has the benefit of serving all the survivors of the deceased and not just benefitting one individual. If the participant survives through the maturity of the policy, he or she is entitled to the paid contributions, any derived investment income, and any underwriting surplus based on the policy contract.

Family Takaful plans could have many other important benefits such as savings for children’s education, payment of loans or mortgages in case of borrower’s untimely death, or protecting a business against premature demise of a key partner or employee. Some Takaful plans are also designed to offer medical coverage and disability insurance.

There are collective benefits of Family Takaful plans for the economy. Family Takaful helps maintain or elevate the standard of living in the society by providing financial assistance to the needy beneficiaries who might otherwise be incapable of becoming productive members of the society. It can help provide funds for education, medical care, and support for women and children. Without access to insurance the needy will tax the social system and become dependent on the state.

Circulation of capital is the fuel of any economic system. The pooling of funds for Takaful provides capital for investment in the economy. Instead of individuals providing funding for small projects, large sums of money can be invested by Takaful operators for mega projects for the economy. These projects help grow the economy by providing the needed infrastructure as well as circulate the capital for further investment and growth.

Family Takaful plans collect contribution from the participants based on the Takaful contract. There is a minimum contribution which is required by the operator based on the face value of the policy as well as age, gender, and health condition of the assured. The contributions are determined through statistical methods and actuarial expertise. Beyond that, the participant can decide to contribute any amount he or she wishes. The excess contributions are dependent on the savings and investment goals of the contributor.

The contributions from policy holders are paid into a common pool of Participants Fund which is then divided into two separate accounts. As with all other Takaful products, a certain portions of the contribution is put into a Participants’ Special Account (PSA) as Tabarru (donation) and the rest belongs to the Participants’ Account (PA) for investment purposes.

PSA is established to provide financial security to the participant’s beneficiaries in case of his/her death. The Takaful operator has to make sure that is account is well funded to accommodate claims, provide reserves, profit sharing expectations between the operator and the participants, and any commissions or other operational expenses. The operators use actuarial methods to arrive at the funding ratios of PSA. Since this account is created from Tabarru, the participant has no right over this amount unless except through a claim. The account exists for mutual help of all participants.

The rest of the participants’ contributions are added to the Participants’ Account for investment and growth. If the participant lives through the maturity of the policy period, he or she can claim his contribution along with the profits from this fund. Tabarru funds given into PSA cannot be given back. The earnings from PA would be normally divided between the operator and the fund based on the agreement of the operator. For example, they would collect a management fee if the model is based on Wakalah. Alternatively, if their contract is Mudarabah, they would keep certain percentage of the profits for their services.

The separation of funds is for accounting purposes only. All the funds are pooled together into the participants fund and invested for profits under Shari’ah guidelines. The Takaful operator usually acts as a Mudarib to manage the investments and shares in the profits based on an agreed formula. For example, if the agreed ration is 70:30, then the participants fund gets credited 30{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} of the investment income and the rest 30{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} is given to the operator. Each participant’s account is credited with proportionate share of the investment income. In practice, the remuneration method of the operator will depend on the Takaful business model selected.