Life insurance is essentially a contract between a person and a life insurance company. In exchange for you making regular premium payments, the insurance company agrees to pay out a lump sum to your beneficiaries upon your death. Choosing life insurance policies can be a difficult task as there is a lot of information to plough through online. For Muslims, comparing and choosing a life insurance plan means that additional consideration needs to be given to insurance plans on the market that are compliant with Islam and Sharia laws and principles. Life insurance is about protecting those you love, and ensuring that when you die your estate is and interests are kept safe. Life insurance pay outs provide an essential benefit to dependants and family members. The life insurance policy does not insure the life of the insured, instead, it is more of a financial transaction that protects families of the deceased from unexpected financial risk in the future.
Whilst Islam does not expressly prohibit life insurance, there are some considerations that need to be borne in mind by those looking for Islam centred insurance products.
LIFE INSURANCE PLANS IN ISLAM
In Islam, life insurance is not seen as contradictory to any Islamic laws or principles. The last few decades have witnessed a monumental rise in the availability and popularity of Islamic banks and finance products in mainstream markets, offering Sharia and Islam compliant products such as Islamic mortgages, life insurance policies and Sharia compliant finance options. Mortgage loans in particular have become increasingly popular amongst people looking for banks that offer financial services that do not contravene any principles of Islam. Conventional mortgage loans were always deemed to be unlawful in Islam due to the interest (riba) elements.
Whilst most life insurance plans do not include interest payments, there have been some questions raised relating to the permissibility of life insurance, particularly when there is an element of risk involved.
Whether the life insurance policy is deemed to be halal in Islam is dependent on the type of life insurance policy you are dealing with.
WHAT ARE THE TYPES OF LIFE INSURANCE
There are various types of life insurance policies available on the market. However, we will focus on two of the most common types of life insurance policy.
WHAT IS WHOLE LIFE INSURANCE?
This type of life insurance policy is one that ends on the date the insured passes away. Whole life insurance policies guarantee the family a pay out when the insured person dies. These types of policies continue to provide lifelong protection by the operators of the insurance policy. Whole life insurance is also known as life assurance. It essentially operates to ensure that whenever you die your family is protected financially when you die. There is no uncertainty about the monies being paid out, but you do have to maintain premium payments on an ongoing basis.
Whole life insurance is far more expensive than term life insurance when it is compared to term insurance (see below).
WHAT IS TERM INSURANCE?
Term insurance policies are considered to be protective insurance policies. These policies cover lost income when the insured dies and cover things like mortgage costs and the coverage protects you for a limited term.
One example of a term insurance policy is where a person is aged 30 and buys a term insurance policy that costs £20 a month. The terms of the policy guarantee a pay out to your beneficiaries of £100,000 if you die before you turn 50. If you do not die before you turn 50 then the policy comes to an end and the insurer is not required to make any payments. There is no guaranteed pay out to beneficiaries (unless of course the insured dies before they turn 50).
Although used interchangeably, the two terms - life insurance and life assurance - are very different. Both are forms of protection designed to pay out sums when a policyholder passes away. When you compare the two, however, it is clear that life insurance relates to a specific term and life assurance covers the whole life of the insured.
ISLAM AND LIFE INSURANCE PLANS
When it comes to Islamic life insurance policies, many scholars agree that when the principles of takaful are applied to insurance then it is deemed as permissible Islamically. Takaful is a form of insurance system that is compliant with Sharia law principles, and it basically involves the pooling and investment of funds.
Takaful is a form is Islamic insurance and is based on principles of cooperation, mutuality, joint interests and indemnity/ debt, solidarity, and common interests.
Policyholders of takaful policies are considered joint investors with the insurance operators. The vendors and the policyholders share in the pooled monies and they also share any losses. There is no guarantee of a positive return on investment, and there is no element of definite and fixed profits.
Muslims looking for Islam and Sharia compliant life insurance policies and products that contain terms that do not contravene Islamic laws need to ensure that they choose policies that do not include the following:
- any element of interest
- ambiguous terms
The basic concept of takaful is that a group of people pool their funds together in a way that does not generate profit, but acts as a mutual benefit to those within the group.
Takaful is about communal, charitable ventures.
The principles of takaful in Islam can be summarised as:
- co-operation between policy holders
- losses and liabilities shared
- uncertainty eliminated or minimised
- No advantage for one party over another
In Islam, the concept of insurance is takaful based - a form of social solidarity. The takaful is based on principles of co-operation and trustees that safeguard the position of each person who has pooled their funds. Muslims looking for life insurance policies should seek to find products that are based around the concept of takaful.
Life insurance with takaful is considered to be fully halal, and provides financial protection alongside long-term savings.
GHARAR AND LIFE INSURANCE
Life insurance is considered to be an important financial planning tool, aimed at providing protection for the family and children of the deceased. However, Muslims looking for Islamic insurance products and services have raised the question about whether some life insurance policies, in particular term insurance policies, contain elements of gharar that deem the policies non-Islamic.
Gharar basically refers to uncertainty, risk, and deception. In transactions where there is a speculative element or a degree of uncertainty.
As term life insurance policies tend to involve an element of uncertainty about whether the pay out will be made (for example, if the insured passes away during the term of the insurance), there have been questions about whether this level of uncertainty leads to gharar. the uncertainty of death, that is only in the hands of Allah (SWT) is deemed to add a nuance of gharar to term life insurance policies.
Whole life insurance policies (life assurance policies) are deemed to be compliant with Sharia laws as there is no element of risk or uncertainty as the pay out is made on death. The certainty lies in the fact that we all die, and there is a guaranteed pay out.
Islam prohibits transactions where there is gharar - uncertainty. Whilst it can be argued that term life insurance policies have an element of uncertainty as none of us really know when we will die, modern insurance policies are less speculative than we like to think. Insurance companies will undertake due diligence based on the health and history of the insured to make sure that the risks are measurable and contained.
Also, it is important to note that, historically, Islam has permitted some gharar is transactions that provide a great benefit and this argument can be applied here.
MAYSIR AND LIFE INSURANCE
Conventional insurance policies, particularly term insurance policies, require that policyholder could lose all the sums they have paid in to the policy if they do not die within the term. Maysir refers to the gambling element within insurance policies. In term insurance policies, whilst there is no profit element, if the insured does not die within the term then the insurance vendor does profit from the premiums paid in.
Islam prohibits gambling, and transactions where there are elements of gambling.
There are some Muslims who may think that term life insurance policies and products contain elements of maysir due to the uncertainty relating to the timing of the death, benefits, and pay out. However, unless a policy contains huge elements of uncertainty and elements of taking a gamble, 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. This is why it is always best to search out policies that are based on Islamic finance rules.
RIBA AND LIFE INSURANCE
We know that riba (interest) is not permissible in Islam, and this is why so many mortgage loans and bank products on the market are not Sharia compliant. Riba usually comes into play in endowment insurance policies that promise a payment that is guaranteed.
Often in endowment policies, the insurance funds are invested in financial products and businesses that may contain elements of riba.
ISLAMIC INSURANCE POLICIES
Muslims looking for insurance policies that comply with Islam and Sharia laws relating to financial products and services need to ensure that elements of uncertainty, risk and interest are not present in the insurance products they invest in.
Those looking for insurance policies that do not contravene any Sharia and Islamic principles should make sure that they undertake due diligence on the contractual terms of the policies and compare and contrast them.
We know that takaful is deemed halal in Islam, so any insurance policy that complies with the principles of takaful should also be deemed to be permissible. If you have a policy with insurers who invest the monies and the investment is in areas deemed haram by Islam (ie industries related to alcohol, gambling, porn etc), then you should look to switch to a policy that is more Sharia compliant.
The key to ensuring you have a life insurance policy that is Sharia compliant is to question what type of policy you have. Is it an investment based policy? Is there an exchange of money? Does it feel speculative? Where are the funds invested? Is there an element of risk that may lead to a cause of action against the insurance company? These are all questions that need to be addressed when looking for a Sharia compliant insurance policy.
Most reasonably minded people would agree that getting your financial affairs in order and protecting your family from financial risks in the future is a responsible action to take. Some people have speculated that taking out life insurance could incentivise others to murder the insured, but this is rarely the case. Insurance policies act as a form of protection, particularly for those who do not have substantial have assets or real property. Life assurance/ whole life insurance policies are considered to be compliant with Islamic rules.
Before you take out any life insurance policy, check for elements of gharar, riba and maysir. These three concepts are not permissible in contracts according to Islamic law.