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One of our brothers/sisters has asked this question:

Assalaamualaikum, Dear Brothers, History of my question:

People avail insurance of any kind to secure them and their family’s future. If someone supposed to avail insurance on car, that would help the car owner to support himself and the co-passengers by paying the medical expenses from the insurance company in case of any accident. And if we ban insurance system thinking both, that it is un-Islamic and due to the insurance coverage people become lethargic and drive harsh, and make accidents, then I would like to know what if, the accident took place one and only due to the mistake of the opposite party and, I am not well financially, hence unable to support my co-passengers’ medical expenses, and I have to let my co-passengers die. Then in this case how come car insurance be haram.

Also, I would request you to throw light on life insurance, where a man/women pays the premium (on monthly, bi-monthly, yearly bases etc.) and collects the money after the policy is matured, how much should one receive if the person dies before the maturing period, and how much should one receive after maturing period where the policy holder is still alive. If insurance is halaal then can you please name the category (if any) of policies or schemes designed for Muslims that I could take up with, or the precaution that I have to take before investing.

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Answer:

Is Insurance Halal?

In the name of Allah, We praise Him, seek His help and ask for His forgiveness. Whoever Allah guides none can misguide, and whoever He allows to fall astray, none can guide them aright. We bear witness that there is none worthy of worship but Allah Alone, and we bear witness that Muhammad (saws) is His slave-servant and the seal of His Messengers.

Brief Introduction:

The word “Insurance” lexically means: “to insure, to guarantee. In its basic form, it is defined as “A contract between two parties whereby one party called the Insurer undertakes in exchange for a fixed sum called “Premium” to pay the other party called the “Insured” a fixed amount of money upon the happening of a certain event.

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Insurance nowadays, has become an essential element of one’s life; right from his business to even his personal life as well.

Its origin and concept and in Islam:

All human beings are invariably exposed to the probable risk of disasters and sufferings such as death, becoming handicap, or destruction of business or wealth, etc.  Notwithstanding the belief of all Muslims in Qadha-o-Qadr, the Fate and Divine Decree, Islam obligates on Muslims to adopt all possible and permissible ways and means to avoid such disasters wherever possible, and to minimize his or his family's financial losses should such events occur.

One possible way out is to buy a policy in the conventional insurance system. An overwhelming majority of the Shariah scholars are of the opinion that it is unlawful and impermissible due to its involvement in Riba, interest, Maisir, (wagering, speculation), and Gharar, uncertainty.

However, Takaful, (joint liability or responsibility) the Islamic alternative to the conventional insurance, is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members of a certain group. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may be inflicted upon any of them, out of the fund they donate collectively in order to create a Takaful Portfolio. The Takaful contract so agreed usually involves the concepts of  Tabarru´ (to donate for benefit of others voluntarily) and mutual sharing of losses, with the overall objective of eliminating the element of uncertainty. The Takaful portfolio is subject to the Shariah conditions, namely risk sharing under Ta'awuni, (the mutual cooperative) principles, coincidence of ownership, participation in management by policyholders, avoidance of Riba (interest) and prohibited investments, and inclusion of Mudharaba (profit and loss sharing investment activity) and/or Wakalah (Investment of funds on the principal’s behalf against a fixed management fee) principles for management and disbursement of the funds.

Takaful is not a new concept in Islamic law. The contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was derived:

i. From ‘Aaqilah’, a group of nearest kith and kin, or a system that is responsible to provide mutual help or indemnification customary, as it was decreed by the Prophet. (PBUH) the blood money or death compensation must be paid by the Aaqilah. (Ibn Maajah-Hadith No 2633)  In case of any natural calamity, every body used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe/ Aaqilah distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

ii. Abu Musa reported that Allah's Messenger (may peace be upon him) said: When the Ash'arites run short of provisions in the campaigns or run short of food for their children in Medina they collect whatever is with them in the cloth and then partake equally from one vessel. They are from me and I am from them. (Muslim Book 31, Number 6094)

Such Takaful system is being applied in all Gulf, some Arab countries, Pakistan, Malaysia, Indonesia, besides some Takaful Insurance companies which offers their products in some European countries also.

Important Note: It is very unfortunate to mention here that Takaful Portfolio management is not being done separately by the Takaful Companies themselves; rather it is again, being managed by the conventional insurance companies, as they are not enough professional to do so.

According to majority of Shariah Scholars `Ulama, it is not permissible to avail “Life Insurance Policy”, even if it is  provided by the Takaful system.

However, it is permissible for a Muslim to avail Takaful policy to insure their properties, consignments, vehicles and other business/factory related equipments, health insurance of one’s own, dependents, and employees.

In case where the Takaful system is not available, a Muslim can avail of the conventional insurance policy, upon necessity and dire-need grounds, only to the extent which is mandatory by the “Law of the Land”. 

Wa Allah A`alam bil Ssawab.

Whatever written of Truth and benefit is only due to Allah’s Assistance and Guidance, and whatever of error is only ones. Allah Alone Knows Best and He is the Only Source of Strength.

Your brother and well wisher in Islam,

Rafeeq AR Shaik