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Takaful

Takaful

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Takaful is a concept in Shari’ah whereby a group of participants mutually agree among themselves to guarantee each other against a defined loss or damage. They do so by contributing a tabarru’ or donation to the tabarru’ fund. True to the precepts of Islam, takaful emphasizes unity and co-operation among its participants.

“And help one another in righteousness and piety and do not help one another in evil deeds and enmity”

(Al Quran : Al Maidah 2)

“(Allah) who prepares nourishment to prevent the fear of hunger and saves /puts at peace those who fear”

(Al Quran : Al-Quraish, 106:4)

To guarantee each other against loss or damage, participants (or certificate owners) make a contribution to a mutual fund. This fund or pool of contribution is called the tabarru’ fund.

The contribution amount made by each participant depends on the type of coverage they need or want, as well as on their personal circumstances. Similar to conventional insurance, a takaful policy (the insurance contract) will specify the period of coverage and the nature of the risk against which the policy is providing a guarantee.

Playing the role of ensuring proper management and admistration of the fund is the takaful operator. The takaful operator charges a fee (this fee is agreed upon by all participants in what is called the Wakalah model) to cover the costs of this management and admistration.

When a participant makes a claim, the payment is made out of the tabarru’ fund. Any surplus, after making provisions for the likely costs of future claims and other reserves, belong to the fund’s participants  and not the takaful operator. This surplus can be distributed to participants in the form of cash dividends or alternatively, participants can choose to use their portion of the surplus to reduce future contributions to the fund.

Simply put, takaful operates on the following principles:

  • Cooperation among policy holders for the common good.
  • Policy holders’ contributions are considered as donations to the tabarru’ fund.
  • Each donation is for the purpose of helping a fellow participant who needs assistance.
  • Losses are divided and liabilities are spread in accordance to the contribution to the fund.
  • Any element of uncertainty concerning contributions and compensation is eliminated.
  • No party makes a profit at the expense of the others.

These principles can be further understood in the next section where we take a look at the differences between takaful and conventional insurance.

Print

Today, takaful is commonly referred to as “Islamic insurance” because of the similarities between the takaful guarantee and conventional insurance. However, there are fundamental differences between the two and these are:

  • Uncertainty or gharar

A conventional insurance contract is said to contain gharar or uncertainty because of the way it is constructed. For example, in the event one party (the policy holder) does not make a claim, the other party (the insurance company) stands to acquire all the profits. This can be seen as the element of uncertainty to the policy holder because he or she does not benefit despite paying premiums. Takaful does not allow for this uncertainty by requiring that all gains or losses, due to investments made from the tabarru’ fund, be in accordance to the policy holders’ (or certificate owners’) contributions.

  • Gambling or maysir due to the presence of excessive uncertainty

Because of uncertainty or gharar, there can be the presence of gambling or maysir as well. Let’s take a look at how this is so: While a conventional insurance policy should always be looked at as a means of protection, someone could take out a policy with the intention of making a large profit. This can happen when the policy holder pays a low premium or pays the premium for a minimal period with the intent of later claiming the sum coverage of the policy. When someone does this, he or she is, in essence, making a bet or gamble that the insured event will occur. He or she will lose money if the event does not occur. Conversely, should the event take place, the loser will then be the insurance company when the amount being claimed is higher than the contributions made by the policy holder. Again, takaful prevents this by making it a requirement that gains or losses made from the investments of the fund is distributed according to the contributions of the fund’s participants.

  • Interest or riba

While there is still some disagreement among Islamic scholars over the exact meaning of riba, it is generally accepted that riba is excessive interest, or a gain that is made unlawfully. It is perceived that conventional insurance, particularly those promising a guaranteed payment, such as endowment policies, contain elements of riba. This is because, in order to make the promised payment or even pay for a policy holder’s claim, an insurance company will most likely invest their policy holders’ money in financial instruments such as bonds. When an insurance company purchases a bond, it is essentially lending money to another party. The insurance company makes a gain from the bond because of the interest that the other party agrees to pay for the use of that money. Based on Syariah precepts, this is seen as riba because the insurance company is seen as exploiting the other party’s need for money to make a profit. Thus, under takaful, contributions to the tabarru’ fund will not be invested in instruments seen to contain elements of riba.

At the core, both takaful and conventional insurance perform the same role. Both provide protection against certain events or give security for the future through the following benefits:

  • Maintaining your current lifestyle even in the event of unforeseen circumstances. You can find out more by reading our article on “Income Protection”.
  • Payment of medical fees and treatment. Read more on “Health Insurance.
  • Settling any outstanding financial obligations such as house or car loans. Our “Debt Cancellation” article talks more about this.
  • Funding your children’s education. Find out more by taking a look at our “Education Fund” article.
  • Growing your money. See how you can make your money work for you so that you can have the retirement you want by reading up on our “Retirement Planning” article.

Yet, due to the differences between takaful and conventional insurance, the former is particularly suitable to those that are looking for an investment or insurance vehicle that provides the benefits above and is also:

  • Based on the concept of mutuality.

Remember that the main point of takaful is that both gains and losses are shouldered by all participants of the fund, thus upholding the principle “bear ye one another’s burden.” Takaful provides one the opportunity to perform “ibadah” or acts of devotion – Surah Al-Baqarah, verse 25. In fact, the word “tabarru’” really means donation or gift in Arabic.

  • Shari’ah-compliant.

Takaful removes all elements that are objectionable according to Shari’ah and this means that there is no gharar, maysir or riba in Takaful.

  • Accountable to Shari’ah.

The Shari’ah Supervisory Board carries out an independent audit to certify that takaful- related operations are free from elements prohibited by Shari’ah.

  • A means for settling obligations, particularly those of a spiritual nature

Dividends can be used to pay outstanding zakat (or tithes), perform Badal Hajj or Amal Jariah.

  • A means to leave a legacy via takaful nominations (or hibah).

With a history spanning 1400 years, rest assured that takaful is a truly time-tested concept of mutual protection and benefit. If you’d like to learn more about Takaful, feel free to contact us. We’ll be happy to answer any of your questions.

Click Here For A Free 1-On-1 Consultation Today!

To guarantee each other against loss or damage, participants (or certificate owners) make a contribution to a mutual fund. This fund or pool of contribution is called the tabarru’ fund.

The contribution amount made by each participant depends on the type of coverage they need or want, as well as on their personal circumstances. Similar to conventional insurance, a takaful policy (the insurance contract) will specify the period of coverage and the nature of the risk against which the policy is providing a guarantee.

Playing the role of ensuring proper management and admistration of the fund is the takaful operator. The takaful operator charges a fee (this fee is agreed upon by all participants in what is called the Wakalah model) to cover the costs of this management and admistration.

When a participant makes a claim, the payment is made out of the tabarru’ fund. Any surplus, after making provisions for the likely costs of future claims and other reserves, belong to the fund’s participants  and not the takaful operator. This surplus can be distributed to participants in the form of cash dividends or alternatively, participants can choose to use their portion of the surplus to reduce future contributions to the fund.

Simply put, takaful operates on the following principles:

  • Cooperation among policy holders for the common good.
  • Policy holders’ contributions are considered as donations to the tabarru’ fund.
  • Each donation is for the purpose of helping a fellow participant who needs assistance.
  • Losses are divided and liabilities are spread in accordance to the contribution to the fund.
  • Any element of uncertainty concerning contributions and compensation is eliminated.
  • No party makes a profit at the expense of the others.

These principles can be further understood in the next section where we take a look at the differences between takaful and conventional insurance.

Print

Today, takaful is commonly referred to as “Islamic insurance” because of the similarities between the takaful guarantee and conventional insurance. However, there are fundamental differences between the two and these are:

  • Uncertainty or gharar

A conventional insurance contract is said to contain gharar or uncertainty because of the way it is constructed. For example, in the event one party (the policy holder) does not make a claim, the other party (the insurance company) stands to acquire all the profits. This can be seen as the element of uncertainty to the policy holder because he or she does not benefit despite paying premiums. Takaful does not allow for this uncertainty by requiring that all gains or losses, due to investments made from the tabarru’ fund, be in accordance to the policy holders’ (or certificate owners’) contributions.

  • Gambling or maysir due to the presence of excessive uncertainty

Because of uncertainty or gharar, there can be the presence of gambling or maysir as well. Let’s take a look at how this is so: While a conventional insurance policy should always be looked at as a means of protection, someone could take out a policy with the intention of making a large profit. This can happen when the policy holder pays a low premium or pays the premium for a minimal period with the intent of later claiming the sum coverage of the policy. When someone does this, he or she is, in essence, making a bet or gamble that the insured event will occur. He or she will lose money if the event does not occur. Conversely, should the event take place, the loser will then be the insurance company when the amount being claimed is higher than the contributions made by the policy holder. Again, takaful prevents this by making it a requirement that gains or losses made from the investments of the fund is distributed according to the contributions of the fund’s participants.

  • Interest or riba

While there is still some disagreement among Islamic scholars over the exact meaning of riba, it is generally accepted that riba is excessive interest, or a gain that is made unlawfully. It is perceived that conventional insurance, particularly those promising a guaranteed payment, such as endowment policies, contain elements of riba. This is because, in order to make the promised payment or even pay for a policy holder’s claim, an insurance company will most likely invest their policy holders’ money in financial instruments such as bonds. When an insurance company purchases a bond, it is essentially lending money to another party. The insurance company makes a gain from the bond because of the interest that the other party agrees to pay for the use of that money. Based on Syariah precepts, this is seen as riba because the insurance company is seen as exploiting the other party’s need for money to make a profit. Thus, under takaful, contributions to the tabarru’ fund will not be invested in instruments seen to contain elements of riba.

At the core, both takaful and conventional insurance perform the same role. Both provide protection against certain events or give security for the future through the following benefits:

  • Maintaining your current lifestyle even in the event of unforeseen circumstances. You can find out more by reading our article on “Income Protection”.
  • Payment of medical fees and treatment. Read more on “Health Insurance.
  • Settling any outstanding financial obligations such as house or car loans. Our “Debt Cancellation” article talks more about this.
  • Funding your children’s education. Find out more by taking a look at our “Education Fund” article.
  • Growing your money. See how you can make your money work for you so that you can have the retirement you want by reading up on our “Retirement Planning” article.

Yet, due to the differences between takaful and conventional insurance, the former is particularly suitable to those that are looking for an investment or insurance vehicle that provides the benefits above and is also:

  • Based on the concept of mutuality.

Remember that the main point of takaful is that both gains and losses are shouldered by all participants of the fund, thus upholding the principle “bear ye one another’s burden.” Takaful provides one the opportunity to perform “ibadah” or acts of devotion – Surah Al-Baqarah, verse 25. In fact, the word “tabarru’” really means donation or gift in Arabic.

  • Shari’ah-compliant.

Takaful removes all elements that are objectionable according to Shari’ah and this means that there is no gharar, maysir or riba in Takaful.

  • Accountable to Shari’ah.

The Shari’ah Supervisory Board carries out an independent audit to certify that takaful- related operations are free from elements prohibited by Shari’ah.

  • A means for settling obligations, particularly those of a spiritual nature

Dividends can be used to pay outstanding zakat (or tithes), perform Badal Hajj or Amal Jariah.

  • A means to leave a legacy via takaful nominations (or hibah).

With a history spanning 1400 years, rest assured that takaful is a truly time-tested concept of mutual protection and benefit. If you’d like to learn more about Takaful, feel free to contact us. We’ll be happy to answer any of your questions.

Click Here For A Free 1-On-1 Consultation Today!

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