Is life insurance allowed in Islam?

Takaful insurance refers to an Islamic way of mutual guarantee by members of

a group that pool their fi nancial resources together against certain losses. Family

takaful or life insurance can be acceptable under Islamic principles if correctly

structured. It has two components: a savings element, whereby individual

participants set aside a sum of money, belonging to each personally, to accumulate

over time; and a risk-sharing element, which is a donation, that a_ ords collective

fi nancial protection in the event a participant su_ ers disability or death. Of course,

as with conventional life insurance, the true recipient (benefi ciary) in the event of

the death of the participant is their family, as designated in the policy terms. Here

again, under takaful rules, the distribution of the policy benefi ts must adhere to

Shari‘ah principles, which provide guidance on priorities assigned for distribution

to nuclear family members, parents, siblings, cousins, etc, who survive the deceased.

As with conventional life insurance, a family takaful policy has a defi ned period

of maturity, an identifi able savings portion, and a periodic installment portion to

cover the risk protection element. There is medical underwriting, typically so that

the relative health of the participant a_ ects the total amount of contribution to

adjust the risk in fairness to the risk pool. There may also be a minimum age, usually

16, and a maximum age, usually 65, limitations, occupational risk considerations,

and adjustments depending upon the age at entry to the plan.

(image taken from AIMS islamic fince university from the course of mba islamic finance)

Provided that the savings element conforms to Shari‘ah investment principles,

there are no serious impediments to the use of family takaful (life) insurance—

assuming that the risk-sharing portion is operated strictly in accordance with

acknowledged takaful principles, including the concept of tabarru’ (donation) as a

contribution towards the collective risk protection element.

Whereas the risk-sharing portion of the contribution is donated to the common

risk pool, and thus belongs to the collective resources, the savings portion of the

contribution remains the exclusive property of the individual participant. Under

the rules of the family takaful policy, the savings accumulated may be withdrawn,

although often subject to fees or penalties for early surrender.

This article was written by my teacher when I was doing my islamic finance course 3 years before now iam sharing it for my students