What is Takaful Insurance: Perfect guide for Islamic Insurance

Takaful Insurance is a legitimate (Halal) alternative to conventional Insurance based on Islamic Finance principles. Takaful is an Arabic word derived from the word “Kafala,” meaning guaranteeing each other. The decision of the Islamic Jurisprudence Councils has established Islamic Insurance.

Takaful insurance companies were created as a different choice from regular insurance. Regular insurance is thought to go against Islamic rules about interest, gambling, and uncertainty, which are not allowed in Sharia.

Islamic Insurance is like a promise among a group of people in the Islamic way. It functions akin to a collective assurance, where all members contribute their individual premiums to a common pool. Together, they agree to compensate any participant facing losses due to an insured risk.

So, everyone puts a little bit of money into a pot. It’s like a team fund. If one of you has a problem, like something wrong, the money from the pool helps them out. It’s like having each other’s back. So, instead of feeling alone when things go wrong, you know your buddies are there to help fix it.

Like conventional Insurance, people have been using it for ages to deal with uncertainty in life, but at the same time, it also comes with its own negatives.

For example, conventional Insurance has negatives, such as a Lack of transparency, Premium fluctuations, Claim denials and delays, Limited customization, Focus on profit margins, dependency on credit ratings, etc.

Islamic scholars agree that Islamic Insurance is in line with Shariah. In Takaful, there’s a shared promise between the company and the person getting insurance. They both help each other out for financial protection. This cooperation fits what Allah said in the Quran’s Surah Al-Maidah 5:2.

تَعْتَدُوا۟ ۘ وَتَعَاوَنُوا۟ عَلَى ٱلْبِرِّ وَٱلتَّقْوَىٰ ۖ وَلَا تَعَاوَنُوا۟ عَلَى ٱلْإِثْمِ وَٱلْعُدْوَٰنِ ۚ وَٱتَّقُوا۟ ٱللَّهَ ۖ إِنَّ ٱللَّهَ شَدِيدُ ٱلْعِقَابِ ٢

Collaborate in righteousness and piety, yet refrain from partnering in sinful or aggressive actions. Be mindful of Allah; indeed, Allah is stern in punishment.

Takaful Basics:

  • It is a type of insurance rooted in Islamic finance based upon Shariah finance law (halal).
  • Follows principles like mutual help and sharing risks, aligned with Islamic law.
  • Avoids riba, mysir, and gharar (interest, gambling, and excessive uncertainty).

Takaful Models:

  • Operates through Mudarabah, Wakalah, and Waqf models.

Popularity and Benefits:

  • Gaining popularity due to awareness of benefits and alignment with religious beliefs.
  • Takaful Insurance is also called as Islamic Insurance in some countries.

Types of Takaful models.

Al-Mudharabah model

The al-Mudharabah model of Islamic Insurance is like a partnership where the Mudharib (manager) and the participant’s Rabbul-Mal (who provides the money) work together. They agree to share the profit from their business based on a specific ratio they decide on.

However, if things don’t go well and there are losses, the participants, who are the ones who provided the money, have to bear those losses.

To ensure the participants are protected, the Takaful operator has to follow strict rules and not invest in too risky things. This way, everyone is careful, and the participants can feel safer about their money.

Al-Wakalah (Agent) Model

In the al-Wakalah model of Takaful, things work differently than in the al-Mudharabah model. Here, it’s like the Takaful operator is more of a helper or an agent for the participants who give the money. The Takaful operator does some essential tasks for the participants and, in return, gets paid a fee for the services provided.

This fee can be a fixed amount or a percentage of the money, or sometimes it’s based on a special agreement about how they’ll share the profits from their investments. So, in al-Wakalah, it’s more like the Takaful operator is a helper working for the participants and getting paid for the help they provide.

Elements of the Islamic Insurance Contract

The Islamic Insurance or takaful contract consists of these elements given below:-

1. The Insured: The insured party could be a person or a Company.

2. The Insurance Company: The insurer represents all participants in Islamic Insurance, forming agreements with the insured. This is done on an agency basis, where fixed fees are charged for facilitating the insurance contracts.

3. The Insured Risk: The forthcoming event is contingent, meaning it may or may not occur. The happening or non-happening of this event is not within the control of either party to the contract, namely the Insured or the insurer. Instead, it is contingent upon fate, such as the possibility of a flood impacting insured goods or a fire affecting the insured house.

4. The Premium: The commitment of the Insured refers to the subscription they provide to the insurer under the terms outlined in the insurance contract.

5. The Amount Insured: The insurer’s commitment represents the utmost amount that the Insurance Company pledges to pay when the anticipated event, covered by the insurance, occurs.

Best Islamic Insurance Companies worldwide.

Here are the list of best companies for Islamic Insurance worldwide.

CountryTop Takaful Insurance Companies
UKMilliman (Click here)
USAShariawiz (Click here)
MalaysiaZurich (Click here) and Presidential BSN (Click here)
GermanyKt-Bank (Click here)
Saudi ArabiaSalama Cooperative Insurance Company (Click here)
KuwaitAman Takaful Insurance (Click here)
QatarQatar Insurance Insurance (Click here)

Understanding the principles of Islamic insurance

The Principals of Islamic Insurance companies have set their foundations on Sharia compliance, interpreting the mentality and values. These companies do not intend to make extra profits by compromising the fundamental rights of the policyholders.

These Insurance companies have principles of justice, fairness, and equality between the policyholders. The Sharia law in Islam does not permit Haram income.

Similarly, the investment involved in these Islamic Insurance companies happens in the areas approved by the Shari’ah law while ensuring the separation of funds and interests of policyholders from funds and shareholders.

  • Risk Sharing: Participants mutually share the risk and contribute to a common fund.
  •  Cooperative Principles: operates on the principle of cooperation and mutual assistance.
  •  No Riba (Interest): adhering to Islamic principles, is free from interest.
  •  No Maysir (Gambling): Transactions in Islamic Insurance avoid speculative elements and gambling.
  •  No Gharar (Excessive Uncertainty): contracts aim to minimize ambiguity and uncertainty.
  •  Separation of Participants’ Funds: Participants’ contributions and Takaful funds are kept separate.
  •  Sharia-Compliant Investments: funds are invested in Sharia-compliant assets.
  •  Surplus Distribution: Any surplus in the Islamic Insurance fund is shared among the participants.
  •  Ethical Investment: Investments are made in businesses that align with Islamic ethical standards.
  •  Transparent Operations: operators are required to maintain transparency in their operations.
  •  Sharia Supervisory Board: companies have a Sharia Supervisory Board to ensure compliance.
  •  Participatory Nature: Participants have a say in the management and decisions of the Takaful fund.

Advantages of Islamic Insurance

Islamic Takaful Insurance benefits both parties, the insurer and the insured, which benefits everyone involved. Here’s why it’s unique:

Collective Protection: Both the parties in Takaful Insurance are Insurers and Insured, depending upon the situation. This means each person is both protected and protects others. 

 If something goes wrong and there’s a loss, the person affected has the right to be compensated. At the same time, by paying premiums, they also become partners in helping others who face losses.

Sharing the Load: Because many people are part of this insurance, not everyone can manage it independently. So, a particular agency, The Islamic Takaful Insurance Company, oversees the operations. 

They handle contracts, collect premiums, and ensure compensation is given to those who need it. It’s like a big community supporting each other during tough times.

Takaful Insurance goes beyond protecting the consequences of the risks in a cooperative way by earning profits through halal investments.  (Islamic Mortgage)

Community Protection: Takaful Insurance creates a community where everyone protects and supports each other.

Fairness: Takaful operates on principles of fairness and justice, ensuring equitable distribution of risks and rewards.

Islamic Principles: Takaful aligns with Islamic principles, avoiding forbidden activities and promoting ethical conduct.

Mutual Help: In Takaful, the community comes together to provide financial assistance if one person faces a loss.

Risk Sharing: The burden of risk is distributed among all participants, making it manageable for everyone.

No Interest: Takaful avoids interest-based transactions, adhering to Islamic finance principles.

Transparency: Takaful operations are transparent, with clear guidelines on managing and distributing funds.

Partnership: Participants act as both beneficiaries and contributors, creating a sense of collaboration in the insurance process.

Shariah Compliance: Takaful strictly follows Shariah guidelines, ensuring all activities are under Islamic law.

Financial Security: Takaful provides financial security and peace of mind to participants and their families.

Community Support: The Takaful community offers emotional and financial support during challenging times, fostering a sense of unity.

Global Takaful Insurance market

In 2022, the Global Takaful Insurance Market was worth a big number, USD 33.50 Bn. And guess what? It’s going to get even bigger! The money it makes is expected to grow by 15.2% from 2023 to 2029, reaching almost USD 90.20 Bn.

Takaful insurance is like the superhero of the insurance world – growing super fast at 20 to 25% every year! Regular insurance is growing slower, just 5% to 5% each year.

This speedy growth is all thanks to people wanting it and the incredible things it offers to customers and business folks doing Islamic insurance.

It’s like a win-win situation! And the best thing about Takaful is connected to something called Islamic Shari’ah, and it’s seen as a better and fairer system. That’s pretty awesome and attractive to everyone, regardless of religion.

Conclusion

So, I hope the concept of Takaful Insurance is clear to you all. The other thing I would like to clear up is the misconception that Takaful is only for Muslims. Due to its clear ethical structure, Takaful can be marketed to Muslims and non-Muslims.

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Author

  • Arish Husain

    Assalam Alaikum beautiful people! someone who loves Prophet Muhammad and his family a lot. I like finding new ways to teach important stuff, so everyone can understand what Allah wants from us and His plans. We learn to listen for whispers from Allah, understand big plans, get ready for whatever Allah has for us, and try our best. I hope Allah's blessings guide us on this special journey.Allah hu Akbar!

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