What Is Takaful? And What Makes The Difference -vs- Conventional Insurance?
This make people always wondered what is the difference between Takaful and Life Insurance?
Takaful is an insurance concept which is grounded in Islamic Muamalat, observing the rules and regulations of Shariah. In principle, Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. In other words, it is the provision of shared contributions to help those who are in need. Although both takaful and conventional insurance have similar basic principles that provide protection in the event of unforeseen events and contributions must be made to start the coverage, there are some major differences between both.
Takaful is a relatively new insurance product that is marketed as an Islamic alternative to conventional insurance and is often referred to as “Islamic” Insurance. However, there are still many people who are still in the dark about what it really is? On some occasions, you may realise some people assume that takaful insurance is an Islamic product open only to Muslims.
Find out more here so you have a better understanding more about the ideas behind takaful insurance more with the simplify form so you have more insurance coverage options and to help you pick the best type of coverage for a better lifestyle.
What is Takaful?
Takaful is a protection plan based on Shariah principles. By contributing a sum of money to a common takaful fund in the form of participative contribution (tabarru’), you undertake a contract (aqad) to become one of the participants by agreeing to mutually help each other, should any of the participants suffer a defined loss. There are various Shariah compliant products under Takaful such as life Takaful, medical Takaful, motor Takaful and many more. The term Takaful also refers to the concept of Islamic insurance based on mutual cooperation, where both risks and funds are shared between the insured and insurer. The Takaful industry in Malaysia is also regulated through the Islamic Financial Services 2013 act.
These contracts must be free of Riba, Maisir and Gharar. What do these Arabic words mean?
Riba – Refers to interest which are related to the investments made by the insurance companies.
Maisir – Refers to elements of gambling where the business could be unstable and gambling on the outcome of its profit margins.
Gharar– is actually defined as unpredictable conditions that are beyond the control of the company.
Gharar and Maisir are very much inter-related, in that they correspond to anything that leads to too much uncertainty and an inability to be clearly define terms or conditions of its dealings.
*Shariah-compliant – it must adhere to all Islamic laws and not involve anything to HARAM. Basically, HARAM is referred to its not allowed to invest in companies that deal in interest, alcohol, gambling or provide too much uncertainty. A takaful insurance company can only invest in HALAL businesses for their investment portfolios work.
Are there any differences between takaful and conventional insurance?
Unlike conventional insurance, which risk is transferred from the insured to the insurer, the Takaful Insurance mutual risk is shared amongst the participants. Takaful operations are based upon the principles of mutuality, whereby each participant makes a donation to a Takaful fund. In the event of its loss, the participant will receive the amount of its claim. All investments managed by the takaful operator are made in accordance to the Shariah law. These funds are managed by the takaful operator on behalf of the participants, which will be beneficial to the participants. On top of that, unlike conventional insurance, the participants retain an ownership interest in the takaful fund. Contributions from the participants are later invested into a ‘HALAL’ or Shariah compliant funds to derive investment income. In the event when the fund generates a surplus, it is then shared among the participants (and, in some cases with the takaful operator). This creates a ‘win-win’ situation to all participants. The takaful operator will also have a Shariah’s Advisory Board who will monitor the activities of the operations in order to ensure that it’s Shariah-compliant. This involves consideration of all aspects of the operations. Takaful and conventional insurance companies share the same objective which is to provide protection to you, your loved ones and your valuable possessions.
How Do You Choose?
Takaful coverage is also available for anyone, and one does not have to be Muslim to take on Takaful coverage or even to be a Takaful agent. It is a new segment market to explore, you should always do your research and familiarise yourself with the product you are going to commit to. Insurance commitments tend to be long term and depending on your needs, a conventional insurance plan could serve better than a takaful based one.
If you would like to explore some takaful insurance products, you may contact us to advise and help out the life, medical cards, car insurance and home insurance section to apply for one through our website.
Are you currently using a takaful based insurance or a conventional one? Share here what you think about them in the comments below.
Thank you for reading!