Takaful represents Islamic insurance, where members donate money to a pool system, ensuring protection against loss or damage. This insurance bears the Takaful brand, which is determined by Sharia, or Islamic religious law, emphasizing collaboration and safeguarding one another. However, Takaful policies include health, life, and general insurance requirements. It was designed as an alternative to commercial insurance, which does not adhere to Islamic principles.
This includes the prohibition of riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles, all considered prohibited in Sharia. Lastly, various claims filed by customers are covered by Takaful coverage.
How Does it Work?
The Takaful operator ensures that all investments abide by Shari’ah law. On behalf of participants, these funds are authorized by this policy.
Furthermore, members maintain an ownership interest in the Takaful fund, unlike conventional insurance. Also, members’ donations are sent to halal and Shari’ah-reported funds, generating investment income.
In addition, members receive money, which is distributed from the losses of the policy. Each Takaful fund operates under the authority of a Shari’ah committee, which allows the sharing ratio to be set annually.
The Takaful pools we access operate on the Mudarabah model, widely practiced in the Asia-Pacific region. This model receives a share of the surplus from the fund manager but does not receive a salary or fee for services.
While Takaful and conventional insurance may appear similar in providing coverage, a Takaful agreement abides by Sharia principles, setting it apart from conventional insurance. Conventional insurance breaks down three main concepts in Sharia: gharar, maysir, and riba.
Gharar
In conventional insurance, premiums are paid for the promise of coverage in the event of a loss. Furthermore, you might not need to file a claim. This uncertainty violates the concept of gharar in Sharia.
Maysir
Maysir, or gambling, is not allowed in Islam, and conventional insurance is viewed as a form of gambling due to the uncertain risk and reward. In conventional insurance, a person may pay premiums for years without needing to use the policy, along with a gamble where the outcome is uncertain.
Riba
Riba, meaning “interest,” is prohibited in Islamic law. Conventional insurance companies usually charge premiums on interest-bearing instruments, which go against Islamic guidelines prohibiting riba in contracts.
Principles of Takaful
Islamic insurance, or Takaful, mandates each member to donate to a fund aimed at supporting one another. This ensures that each member provides enough coverage for anticipated claims.
The fundamental principles of Takaful can be summarized as follows:
- Policyholders collaborate for their collective welfare.
- Each policyholder contributes a portion of the contribution as a donation to aid those in need.
- Losses are shared, and liabilities are distributed through a community pooling system.
- Uncertainty is eradicated concerning subscriptions and compensation.
- It does not aim to gain an advantage at the expense of others.
In addition, Takaful is considered cooperative insurance, where members donate to a common pool. The objective is to ensure the principle of bearing one another’s burdens.
Types of Takaful
Conventional insurance involves policyholders paying insurers to protect them from risks. However, it combines both the insurer and the insured, who are members of the contract.
Also, different contract models, such as Wakalah (agency), Mudharabah (profit-sharing), and a hybrid model, are authorized to offer coverage for takaful contracts.
In the Wakalah model, the Islamic insurance company is an agent for the takaful contract. This involves the management of member funds, with members covering an amount for the agent’s services.
Mudharabah contracts operate on a profit-sharing basis. Takaful members and the contract manager engage in a venture where members donate capital through premium payments.
Additionally, the manager offers expertise and skills to fund the Sharia-compliant avenues. Profits generated from these investments are shared among the participants and the manager at a pre-agreed rate.
Lastly, the manager’s compensation is received if the investment’s shared profit results in losses. The hybrid model merges both Wakalah and Mudharabah. Here, the takaful manager receives a predetermined Wakalah fee and, in addition, shares of the profits from the takaful fund investments.
Differences between Takaful and Conventional Insurance
As mentioned, the difference between Takaful, or Islamic, insurance and conventional insurance in comparisons is highlighted below:
In Takaful, participants’ and shareholders’ funds are invested in Shariah-compliant investment channels. While conventional insurance pools funds from premiums, investing in various channels. Conventional insurance engages in the charging of interest, which violates Islamic financial principles. However, it operates on the principle of tabarru, where a portion of participants’ contributions is considered a donation.
Moreso, Takaful participants contribute amounts to the fund, aiding fellow participants in times of need or loss. Meanwhile, conventional insurance receives premiums, preparing for “expected risks.”
Takaful necessitates the distribution of surpluses from the participants’ solidarity fund among the participants. Meanwhile, in conventional insurance, surpluses and profits are directly allocated to the company or shareholders. Lastly, the foundation of Takaful lies in the principle of mutual assistance, while conventional insurance focuses on commercial practices.
What does Takaful Insurance cover?
Takaful contracts serve as an alternative to conventional insurance, providing coverage for various aspects, divided into two main categories: general takaful and family takaful.
General Takaful
These contracts extend coverage to your assets, like your residence, business, or vehicle. The workings of these takaful groups closely resemble those of regular insurance, all while adhering to Sharia principles.
For instance, choosing a personal liability takaful contract can safeguard you from legal action, functioning similarly to personal liability insurance.
Family Takaful
This coverage provides the same benefits as life insurance. These plans have an extended duration, offering protection for you and your family against uncertainties like death or illness.
Additionally, they assist in long-term savings. Donations made to family takaful plans are allocated to two distinct accounts. Firstly, it’s for supporting the takaful group in case of losses, while another is for personal accounts where money is paid through Sharia-compliant avenues to foster savings growth.
How to Get Takaful Insurance
Takaful is recognized worldwide due to restrictions in countries such as the United States. These restrictions pose challenges for providers attempting to offer takaful contracts.
Additionally, in nations with a significant Muslim population, like Malaysia, takaful serves as a viable alternative to conventional insurance. For Muslims seeking to enroll in takaful within regions with limited options, consulting local religious leaders is advisable.
Also, engaging in discussions about insurance or acceptable alternatives can aid in managing the risk of potential losses. In countries where takaful options are accessible, the process involves researching local takaful operators and subsequently signing up for a suitable takaful plan.
Conclusion
The collaboration between the Takaful provider and the bank operates through an agency-principal arrangement, typically with the bank serving as the agent. This symbiotic relationship allows both entities to benefit and contribute to their overall success.