Why conventional Life Insurance is Haram
Objections raised on Conventional Life Insurance
Apart from the commonly held view among Muslims that life insurance is not permissible in Islam on the grounds that it reflects disbelief that God has decreed the moment of one’s death, or distrust in God’s providence, some Islamic scholars and many Muslims take a strong view that life insurance is totally prohibited in Islam because of the way life insurance is operated in the conventional system. Conventional insurance contains elements that are not in conformity with the principles of Shari’ah:
· A life insurance policy under the conventional system contains elements of riba where premium income is invested in interest-bearing assets and securities.
· An element of interest also exists in conventional life insurance products – as the insured, on his death, is entitled to get much more than he has paid
· Insurance funds invested in financial instruments such as bonds and stocks contain an element of riba. Takaful contributions paid by participants/policyholders under a Takaful scheme are operated on the basis of mudarabah (profit-and-loss sharing) free from elements of riba.
· The insured contributes a small amount of premium in the expectation of gaining a large sum
· The insured loses the money paid for the premium when the insured event does not occur
· The insurance company will be in deficit if claims are higher than the premiums paid when a life insurance policyholder dies after only paying part of the premium his dependents receive a certain some of money which the policyholder has not been informed of and has no knowledge as to how and from where it has been derived.
· The idea of a conventionally designed life insurance policy is that if the assured dies at any time before the maturity of the policy, the nominee(s) is entitled to recover from the insurer the whole amount agreed in the policy. While if the assured is alive at the expiry of a permanent life policy period, the insured is also entitled to the whole amount agreed in the policy, plus the interest, dividends and bonus, subject to the company’s policy. On the contrary, the paradigm of a Takaful model of life insurance is that if the assured dies at any time before the policy matures, the beneficiary(s) is entitled to recover from the insurance company the whole amount of paid premiums, the bonus and dividends according to the company’s policy and a share of the profits made on the paid premiums, plus a donation from the company’s charitable fund according to the financial status of the beneficiary(s) (i.e. if the beneficiary(s) is financially in good condition the amount will be less, but if the beneficiary(s) is financially weak and unstable the amount could be greater). Such a transaction is considered as co-operation towards the welfare of the helpless people in society, and it is thus in line with the ruling in The Qur’an. “…Help ye one another in righteousness and piety...” [5:2]
· However in the case that the assured is still alive upon the expiry of the policy period, the assured is entitled to recover from the company the whole amount of the paid premiums, a share of the profit made on the paid premiums according to the principle of mudarabah bonus and dividends according to the Takaful company’s policy.
· The insurance contract contains excess uncertainty whereby a person pays a cash amount for payment of a claim against the occurrence of a future event when it is not known whether the event will actually take place and the time it will occur is also not known. Any form of contract which is characterized by the domination of one party at the expense and unjust loss to the other is classified as Gharar. When a claim is not made the insurance company may acquire all the profits whilst the participant may not obtain any profit whatsoever. The loss of premiums on cancellation of a life insurance policy by the policyholder, or the "double standard" condition of charging a customary short period in general insurance, whilst only a proportional refund is made if the insurance company terminates the cover is also considered as unjust.
· In the operation of a life insurance policy under the conventional system, the payments for the agents are to be paid out of the insured’s paid premiums.
· Whereas under the Islamic model of a life insurance policy the agents work for the company and thus they should be paid by the company itself. This means, the payment for the agents could include a share of the profits made on the paid premiums, plus dividends and bonus according to the company’s policy.
· Everyone has unlimited insurable interest in their own life and, theoretically is entitled to effect a policy for any sum assured. In practice, the cost of the policy often limits a person’s ability to insure his or her own life; a person who is married also has interest in the life of his or her own spouse. Certain people can insure the life of others with whom they bear a relationship, recognized in law, to the extent of a possible loss. Accordingly, in a business partnership the partners can insure each other’s lives, as they stand to lose on the death of one of them. In the same way a creditor stands to lose money if an unsecured debtor dies before repaying the loan, and therefore has insurable interest to the extent of the unsecured loan plus interest.
· In a conventional system of life insurance, the nominee(s) is an absolute beneficiary(s). Suffian J., in Re Man bin Mihat by virtue of Section 23(1) of The Malaysian Civil Law Act 1956, decided that the nominee inter alia in a life insurance policy is an absolute beneficiary who takes absolutely and exclusively the benefits of the policy. In contrast, the nominee(s) in a life policy under the Takaful model is not an absolute beneficiary(s) but a mere trustee, who is in a position to receive the benefits of the policy on behalf of the insured’s heirs and distribute it among them according to the principles of mirath (inheritance) and wasiyah (bequest). In Karim V. Hanifa, The High Court of Karachi ruled that the nominee(s) in a life insurance policy is nothing more than an agent. The National Council of Muslim Religious Affairs in Malaysia, also issued a Fatwa to the same effect in 1979, that the nominee(s) in a life insurance is a mere trustee who is supposed to receive the benefit of the policy and distribute it among the heirs of the assured, according to the principles of mirath and wasiyah.
· In other words, the insurable interest, under the conventional system it is vested in the policyholder solely, should he/she be alive upon the expiry of the policy period. However, in the event of the death of the insured within the policy period, the insurable interest will be paid to the husband or wife, parents or children, benefactor or other nominated beneficiary or trustee, company and director, partners, mortgagor and mortgagee, according to the policy. In contrast, under the Islamic model, insurable interest is vested in the assured or in the insured’s heirs, according to the principles of mirath and wasiayah.
· Having a life insurance policy does not mean just insuring one’s life but is a fair financial transaction for the benefit of certain helpless people in society. The rationale behind having life insurance may be considered as follows:
· It is one of the means used to provide a material safeguard for the offspring of the deceased and thus in line with the saying of Prophet Muhammad: “It is better for you to leave your off-spring wealthy than to leave them poor, asking others for help” (narrated by Sayid bin Abi- Waqqas, Companion of Prophet Muhammad)
· It provides future material security for widows and other dependents of the deceased (assured). Prophet Muhammad in fact encouraged the provision of security for widows and poor persons, as recorded in one of his Traditions: “One who looks after and works for a widow and for a poor person (dependent), is like a warrior fighting for the cause of Allah, or like a person who fasts during the day and prays throughout the night’ (narrated by Safawan bin Salia, Companion of Prophet Muhammad)
· It ensures that certain persons (widows, orphans, etc) will have protection from unexpected future material difficulties, which otherwise may result in hardship for those people. Prophet Muhammad advised the people to protect one another from any form of hardship and difficulties when he said to them: “Whoever removes worldly grief from a believer, Allah (SWT) will remove from him one of the grief’s of the Day of Judgment. Whoever alleviates the problems of a needy person Allah will alleviate his problems in this world and the next “ (narrated by Abu Huraira, Companion of Prophet Muhammad)
· It ensures co-operation and solidarity among participants. It is also a positive initiative by the assured towards a positive material status for widows, offspring, etc. Hence, such co-operation towards a positive goal is, in fact, ruled in The Qur’an.
· “Help ye one another in righteousness and piety’’ [5:2]
· It is like taking an initiative towards ensuring a self-reliant society and alleviating hardships. It is in line with the Qur’an ruling. “Allah intends easy life for all of you, while He does not want you to be in difficulties...” [2:185]