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What is Life Insurance in Islam - You Need To Know

A life insurance policy is simply a contract between an individual and a life insurance company. The insurance company promises to pay a lump amount..

What is Life Insurance in Islam - You Need To Know

WHAT EXACTLY IS LIFE INSURANCE?

A life insurance policy is simply a contract between an individual and a life insurance company. The insurance company promises to pay a lump amount to your beneficiaries upon your death in return for you making recurring premium payments. Choosing life insurance policies may be a challenging undertaking because there is so much information available online. Comparing and selecting a life insurance plan for Muslims entails giving special consideration to insurance plans on the market that follow Islam and Sharia rules and principles. Life insurance is about safeguarding those you care about and ensuring that your estate and interests are protected when you die. Life insurance payouts are a necessary benefit for dependents and family members. The life insurance policy does not cover the insured's life; instead, it is a financial transaction that protects the deceased's family against unanticipated financial risk in the future.

While Islam does not explicitly forbid life insurance, several factors to consider while shopping for Islam-centered insurance products.

IN ISLAM, LIFE INSURANCE PLANS

Life insurance is not viewed as antithetical to any Islamic rules or values in Islam. The availability and popularity of Islamic banking and financial products in mainstream markets have increased dramatically over the last several decades, delivering Sharia.

Islam compliance products such as Islamic mortgages, life insurance policies, and Sharia-compliant financing choices. Mortgage loans, in particular, have grown in popularity among consumers searching for banks that provide financial services that do not violate any Islamic beliefs. Because of the interest (riba) components, conventional mortgage loans have traditionally been considered illegal in Islam.

While most life insurance policies do not contain interest payments, some concerns have been raised about the legality of life insurance, mainly when a risk factor is involved.

The sort of life insurance policy you are dealing with will determine whether it is considered halal in Islam.

WHAT ARE THE DIFFERENT KINDS OF LIFE INSURANCE?

On the market, there are numerous types of life insurance policies. We shall, however, concentrate on two of the most prevalent forms of life insurance policies.

WHAT EXACTLY IS WHOLE LIFE INSURANCE?

This form of life insurance coverage expires on the date the policyholder dies. When the insured individual dies, whole life insurance policies payout to the family. The operators of the insurance policy continue to give lasting protection under these sorts of policies. Life assurance is another term for whole life insurance. Its primary function is to ensure that your family is financially secure in the event of your death. There is no doubt about the funds being paid out, but you must regularly make premium payments.

When comparing whole life insurance to term life insurance, entire life insurance is significantly more expensive (see below).

WHAT EXACTLY IS TERM INSURANCE?

Term insurance policies are regarded as protective insurance policies. These policies cover lost income when the insured dies and mortgage payments, and the coverage is only for a short time.

Suppose a 30-year-old man purchases a £20-per-month term insurance policy as an example of a term insurance policy. If you die before the age of 50, the insurance guarantees a £100,000 payout to your dependents. If you do not die before 50, the insurance terminates, and the insurer is not compelled to make any payments. Beneficiaries are not guaranteed a price (unless the insured dies before they turn 50).

Although "life insurance" and "life assurance" are interchangeable, they are not the same. Both are types of insurance that pay out payments when a policyholder dies. When the two are compared, it is evident that life insurance refers to a defined duration. Still, life assurance protects the insured for the rest of their life.

LIFE INSURANCE PLANS AND ISLAM

When it comes to Islamic life insurance policies, many scholars believe that it is declared Islamically lawful when takaful principles are applied to insurance. Takaful is a Sharia-compliant insurance scheme that essentially entails the pooling and investment of assets.

Takaful is Islamic insurance founded on collaboration, mutuality, shared interests, indemnity/debt, solidarity, and shared interests.

Takaful policyholders are considered joint investors with the insurance policies. The vendors and policyholders share the pooled funds as well as any losses. There is no certainty of a good return on investment, and no element of definite and stable earnings exists.

Muslims seeking Islamic and Sharia-compliant life insurance policies and products with conditions that do not violate Islamic law should select policies that do not include the following:

  • any aspect of interest
  • uncertainty
  • high-risk
  • confusing phrases
  • gambling

All of these are forbidden in Islam.

The main idea behind takaful is that a group of individuals pool their finances in a way that does not create profit but serves as a mutual benefit to all in the group.

Takaful is about community, charitable projects.

In Islam, the concepts of takaful can be summarized as follows:

  • cooperation among policyholders
  • shared losses and liabilities
  • uncertainty reduced or lessened
  • There is no benefit for one side over another.

In Islam, insurance is founded on takaful, which is a sort of communal solidarity. The takaful is based on cooperative principles and trustees who protect the status of each individual who has pooled their wealth. Muslims searching for life insurance policies should opt for products that are based on the takaful idea.

Takaful life insurance is halal and provides financial security in addition to long-term savings.

LIFE INSURANCE AND GHARAR

Life insurance is seen as an essential financial planning instrument to protect the deceased's family and children. However, Muslims seeking Islamic insurance products and services have questioned whether some life insurance policies, particularly term insurance policies, include gharar characteristics that render the policies non-Islamic.

Gharar is an Arabic word that means "uncertainty, danger, and deceit." When there is a theoretical aspect or a degree of uncertainty in a transaction.

Because term life insurance policies sometimes include an element of doubt about whether the payout will be made (for example, if the insured dies within the period of the insurance). 

There has been some debate regarding whether this amount of uncertainty contributes to gharar. The fate of death, which is solely in the hands of Allah (SWT), is seen to provide a gharar aspect to term life insurance policies.

Whole life insurance policies (life assurance policies) are considered Sharia-compliant since there is no element of risk or ambiguity because the payout is made on death. The certainty is that we will all die, and there will be a substantial payout.

Transactions where there is gharar - doubt - are forbidden in Islam. While it is true that term life insurance policies involve uncertainty since no one knows when they will die. Current insurance policies are less speculative than we would like to believe. Insurance firms will do due diligence based on the insured's health and history to quantify and contain the risks.

It is also worth noting that, traditionally, Islam has authorized some gharar, which are trades that produce a significant advantage, and this reasoning can be used here.

LIFE INSURANCE AND MAYSIR

Conventional insurance policies, particularly term insurance policies, require that policyholders risk losing all of their money if they do not die within the period. Maysir is referring to the gambling component in insurance policies. While there is no profit aspect in term insurance policies, the insurance vendor does profit from the premiums put in if the insured does not die during the period.

Islam forbids gaming and transactions containing gambling components.

Because of the uncertainty around the timing of death, benefits, and payout, some Muslims may believe that term life insurance policies and products contain components of maysir. However, until an approach involves significant aspects of ambiguity and risk, maysir is unlikely to apply thoroughly. Finally, it is the obligation of the individual seeking insurance coverage to ensure that it does not violate any Islamic laws or guidelines. That is why it is always advisable to seek out policies based on Islamic financial principles.

LIFE INSURANCE AND THE RIBA

We all know that riba (interest) is forbidden in Islam, which is why so many mortgage loans and bank products on the market are not Sharia-compliant. Riba is typically used in endowment insurance policies that provide a guaranteed payment.

Endowment policies frequently invest the insurance funds in financial products and enterprises that may have riba features.

POLICIES FOR ISLAMIC INSURANCE

Muslims seeking insurance policies that adhere to Islam and Sharia regulations governing financial products and services must ensure that elements of uncertainty, risk, and interest are not present in the insurance products in which they invest.

Those seeking insurance policies that do not violate any Sharia or Islamic standards should do due diligence on the contractual provisions of the policies and compare and contrast them.

We know that takaful is considered halal in Islam. Thus any insurance coverage that adheres to the principles of takaful should be regarded as legal as well. If you have a policy with insurers that invest the funds, the investments are in areas designated haram by Islam. (e.g., sectors associated with Alc0h0l, Gamb1ing, P0rn, etc.), it would be best if you considered switching to a more Sharia-compliant coverage.

CONCLUSION

The key to ensuring you have Sharia-compliant life insurance coverage is to query the sort of policy you have. Is it a policy based on investment? Is there a monetary exchange? Is it speculative in any way? Where are the monies going to be invested? Is there a danger that might give rise to a claim against the insurance company? All of these concerns must be addressed while looking for Sharia-compliant insurance coverage.

Most rational individuals would agree that getting your financial affairs in order and safeguarding your family from potential financial dangers is a decent thing to do. Some have argued that purchasing life insurance may incite others to murder the insured. However, this is seldom. Insurance policies serve as protection, especially for people who do not have significant assets or real estate. Life assurance/whole life insurance policies are said to be following Islamic principles.

Check for gharar, riba, and maysir aspects before purchasing a life insurance policy. According to Islamic law, these three notions are not acceptable in contracts.

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