Navigating Insurance with the Perspective of Islam

Have you ever thought that if you purchased a new car, you would be anxious to drive it? You would use your car carefully with love, wash and clean it every day, and even a single scratch might give you a heart attack. In such a situation, you might think about what would happen if your car is stolen or hits an accident. It would cause a huge financial loss along with emotional damage, but you can’t ignore the reality that if you have the car, you must bring it on the road; otherwise, there will be no use of the car, and its risk is ought to be taken. Now, for this mental peace and security, an insurance company comes (steps in)and offers you a solution as coverage to give you coverage for the car if any (possible damage is done) it receives any damage. For this mental and emotional peace, an insurance company plays an important role; it comes and takes responsibility for theft, stolen stealth, accidents and takes its burden on its shoulders. But here’s another tricky part? As a Muslim, can you still use insurance? Is it compliant with the guidelines set by Allah SWT? If it’s not compliant with the guidelines set by Allah SWT, then again, as a Muslim, you will be suffering from mental peace. To filter this check, we need to understand what insurance is and what Islam says about it.

Why Conventional Insurance is Prohibited in Islam

Conventional insurance is generally considered haram (forbidden) in Islam due to the presence of four key elements: Riba, Gharar, Qimar, and Debt sale against Debt Sale.

1. Riba (Interest)*: Conventional insurance involves a compensatory contract. A policyholder pays premiums and may receive a claim that is either more or less than the total premiums paid. This excess or deficit is considered a form of Riba, which is strictly prohibited.

2. Gharar (Excessive Uncertainty)*: The core of an insurance contract is uncertain. The policyholder pays premiums on the possibility of a future event (e.g., a car accident) that may or may not occur. This uncertainty about the outcome of the contract is considered excessive and therefore invalidates the contract under Sharia.

3. Qimar (Gambling)*: The nature of conventional insurance is similar to gambling. The policyholder’s potential gain (receiving a payout) or loss (not receiving a payout despite paying premiums) is dependent on an uncertain event. This element of chance, where one party gains at the expense of the other, is described and categorized as Qimar.

Debt Sale vs Debt Sale :

As we establish this fact that its just like a sale contract of money which is being exchanged with money . If premium holder purchases the policy of 20,000 USD and pays one 1,000 USD per month it means 19,000 USD is a debt on the policy holder to pay . On the other hand ???? For the company? the company it will be debt on the company to pay coverage of the damage . Hence one debt is against another debt which is prohibited in the eyes of Shariah.

Navigating Insurance in Different Scenarios

The permissibility of insurance for Muslims often depends on specific circumstances. Here’s a breakdown of how to approach different types of insurance:

1. Compulsory Insurance (e.g., Third-Party Motor, Medical): In cases where insurance is legally mandated mandatory by the government and there is no Islamic alternative (Takaful) available, it may be permissible to purchase a conventional policy out of necessity. However, a key condition applies: in the event of a claim, you are only permitted to receive an amount equivalent to the total premiums you have paid. Any amount received over this must be given to charity without the intention of receiving a reward.

2. Insurance for Necessity (e.g., Travel Insurance for the Elderly): Similar to compulsory insurance, if an insurance policy is a prerequisite for a necessary activity (such as an elderly person being required to have travel insurance to fly) and no Islamic alternative exists, it can be taken. The same rule regarding the claim amount applies: only take what you have paid in premiums and donate any surplus to charity.

3. Voluntary Insurance (e.g., Home, Life, Business): Conventional insurance products that are neither compulsory nor a necessity are not permissible. This includes life insurance, property insurance, and various business-related policies. Muslims should avoid these products and seek out Islamic alternatives.

4. Employer-Provided Medical Insurance: If an employer provides free medical insurance as a benefit, the employee’s permissibility depends on the interaction with the insurance company. If the employer pays the premiums and handles all the transactions, it is generally considered permissible for the employee to use the benefit. However, if the employee is required to sign a contract directly with the insurance company or is responsible for recovering expenses from the company, it becomes impermissible, as this directly involves the employee in a non-compliant contract. In this situation, the employee should only recover an amount equal to what the company has paid in premiums on their behalf.

Takaful: The Islamic Alternative to Conventional Insurance

The Islamic alternative to conventional insurance is Takaful, an Arabic word meaning “guaranteeing each other.” Takaful is a system of cooperative insurance based on the principles of Ta’awun (cooperation) and Tabarru (donation).

How Takaful Works:

A Cooperative Pool: Participants in a Takaful scheme contribute to a common fund (Waqf) through donations.

Risk Sharing: This fund is used to compensate any member who suffers a loss or damage. Unlike conventional insurance, the risk is shared collectively among the participants, not transferred to a third-party company.

Sharia-Compliant Management: A Takaful company acts as the manager of this fund, charging a fee for its services. The fund’s assets are invested in Sharia-compliant businesses to generate halal profit.

Surplus Distribution: Any surplus remaining in the fund after paying out claims and administrative fees can be distributed back to the participants or reinvested, based on the company’s rules and Sharia board oversight.

Conclusion :

In countries where Takaful companies operate, Muslims should opt for these Sharia-compliant alternatives. In countries where they are not available, there is a collective responsibility for Muslims to establish these institutions to provide a legitimate alternative.