Is Life Insurance Halal or Haram?

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With permanent life insurance, the concern is that these policies include an investment component (aka cash value) that earns interest. Because the cash value component exhibits characteristics that go against the principles of Islam — such as maysir (gambling) — permanent life insurance may be regarded as haram.

Term life insurance policies may be considered halal (or Shariah-compliant) because they are designed to pay only the death benefit, not accumulate cash value. A term life policy is also more affordable and straightforward than other life insurance options.

Here are the three key reasons why term life insurance policies may be considered Shariah-compliant:

• No investment component. Term life doesn’t include an investment component that earns interest (riba)
• Straightforward protection. Term life offers uncomplicated coverage without speculative elements such as gambling (maysir) and gharar (uncertainty).
• Aligns with the principle of responsibility and care. The Quran emphasizes taking good care of your loved ones. Term life nicely aligns with this goal since it gives your family a lump sum upon your death to help them live comfortably.

Islamic Perspective on Term Life Insurance

If you’re wondering how Islamic scholars view term life insurance, the answer is that opinions vary.

• Permissible (Halal): Some Islamic scholars believe the term life insurance is acceptable (or halal). It doesn’t include prohibitive features such as interest (riba) and helps you safeguard your family’s financial future.
• Conditional permissibility: Some others suggest that the term life is permissible only if it is structured in a specific way. For example, Takaful insurance—a form of cooperative insurance—is unambiguously halal.
• Not allowed (haram): A few scholars think the Islamic religion prohibits all forms of traditional life insurance, including term life insurance, because they involve gharar (uncertainty). The stance against traditional insurance posits that it is a gharar-based transaction, where an uncertain outcome is purchased in exchange for a premium. Take term life insurance, for instance. You are still determining if you will die during the policy term, and many people who buy term life lose all the premiums they pay. Additionally, term life insurance policies are often associated with elements of maysir (gambling) and gharar (uncertainty), as they only pay out if the insured dies within the term, leading to a perception of risk and speculation.

Islamic Perspective on Whole Life Insurance

Whole life insurance is the most popular type of permanent life insurance. Whole life insurance combines lifelong insurance coverage with an investment component. Besides providing your family with a death benefit, the policy grows cash value at a fixed rate yearly. Your beneficiary receives the death benefit (or sum assured) upon your death, whereas the cash value is for you — the policy owner — to use however you like. 

Most Islamic Scholars believe whole life insurance is haram (not permissible) because it involves riba (interest), gharar (uncertainty), and maysir (gambling). 

What is Shariah-Compliant Life Insurance?

Shariah-compliant life insurance, or Takaful, is a type of insurance that follows the rules and principles of Islamic law, or Shariah. In Takaful, participants contribute money into a pool system to provide financial protection against predefined risks. In contrast to traditional insurance, which focuses on profit generation, Takaful is founded on principles of fairness, mutual support, and ethical behavior. 

Here’s a brief overview of how Shariah-compliant life insurance works: 

• Participants or policyholders pay regular premiums into a money pool, referred to as the Takaful fund
• When a policyholder dies, funds from the Takaful fund are used to offer financial support to their designated beneficiary.
• The participants appoint a Takaful operator, who manages the funds and charges an administration fee.
• Any surplus in the Takaful fund is distributed among the participants

Pros and Cons of Takaful Insurance

Like any financial product, Takaful insurance has pros and cons. Knowing about them can help you make an informed decision about whether it is right for you. 

Pros

• Shariah-compliant: Takaful is structured according to the principles of shared responsibility, shared guarantee, collective assurance, and mutual undertakings. This makes it a good option for Muslims seeking to manage their financial matters in line with their religious principles.
• Social responsibility: Takaful contributes to society’s well-being by offering support and financial stability to individuals who require assistance. 
• Fairness: Takaful operates purely profit-and-loss-sharing, ensuring no member benefits unfairly. 
• Transparency: Takaful strongly emphasizes transparency due to its collaborative nature and adherence to Shariah. This, in turn, fosters trust and fairness within the system. 
• Excess sharing: If the Takaful fund accumulates a surplus after all claims and expenses are paid, the surplus is either distributed among all the participants or is used to reduce future contributions. 

Cons

• Limited availability: Takaful insurance is not commonly available in Canada, and its options are somewhat limited compared to conventional life insurance solutions. 
• Potential for exclusions: Takaful insurance may include certain exclusions not found in conventional life insurance policies. An exclusion, in insurance parlance, is an event or circumstance that prevents a policy beneficiary from collecting the death benefit.

Is Takaful Insurance Available in Canada?

Yes, Takaful insurance is available in Canada, but it has yet to be widely available, and options are limited. For instance, Ethical Insurance, touted as Canada’s first provider of Takaful products, specializes only in construction & commercial property liability risks. On the other hand, Ansar Cooperative Housing Corporation, a mutual insurance provider, writes only home and auto insurance policies. 

If you are looking for Islamic insurance in Canada, you might need help finding a provider. However, your term life insurance could be a suitable option since it allows you to secure your family’s financial future. Because options for Shariah-compliant life insurance in Canada are almost non-existent, many Islamic scholars permit term life insurance so that you can take good care of your family. 

Traditional Life Insurance vs Islamic Life Insurance

Takaful insurance adheres to the principles of the Sharia or Islamic law. Conventional life insurance, by contrast, is not designed to comply with the rules and principles of any religion.

Another crucial difference between the two is in the manner in which risk is managed. In the case of conventional life insurance, the insurer assumes the risk of insuring you in exchange for regular premium payments. A life insurance company agrees to pay out a defined sum to beneficiaries upon the insured's death. Whereas, in Takaful insurance, the risk is shared by all policy owners. Premiums paid by the policyholders go into a Takaful fund, and when a covered event occurs, the promised benefit is paid from it.

Also, a life insurance company aims to maximize profits for their shareholders. In contrast, Takaful insurance embodies the spirit of caring within the Muslim community. Any surplus remaining in the Takaful fund is shared among its participants.

The following table highlights the key differences between Takaful insurance and conventional life insurance:

Similarities between Takaful Insurance and Traditional Life Insurance

• Both pay a death benefit in the event of death
• You must pay premiums on time to maintain coverage
• Both involve professional underwriting
• When a covered event occurs, the beneficiary must file a claim for the cash benefit.

Is Term Life Insurance Halal?

The permissibility of term life insurance as halal is subject to the interpretations of Islamic scholars. Some scholars are of the opinion that all forms of traditional life insurance are haram.

On the other hand, some Islamic scholars say that Shariah Law permits a person to secure their family’s financial well-being with term life insurance because of al-dharura (the necessity) and al-hajja (the need to look after one’s dependents). They believe term life insurance is Shariah compliant since it doesn’t have an investment component. Term life policies are simply a means to provide your family with a financial safety net if something happens to you. 

In summary, term life insurance does not accrue interest, making it a potentially better option compared to universal life and whole life insurance, both of which double as investment tools. 

How to Choose a Sharia-Compliant Life Insurance Policy

Choosing a Shariah-compliant life insurance policy requires careful consideration of several factors. Here are some steps to help you make an informed decision:

1. Understand the principles of Shariah-compliant life insurance: Familiarize yourself with the principles of Takaful and how they differ from a traditional life insurance policy.
2. Research Islamic insurance companies: Look for an insurance company that offers Shariah-compliant life insurance policies and has a good reputation in the market.
3. Check the policy’s compliance with Islamic law: Ensure that the policy complies with Islamic law and principles, including the prohibition of riba (interest) and gharar (uncertainty).
4. Review the policy’s terms and conditions: Carefully review them to ensure that they meet your needs and comply with Islamic insurance.
5. Consider the premiums paid: Ensure that the premiums paid are used to fund Shariah-compliant investments and are not invested in interest-bearing assets.
6. Look for transparency and disclosure: Choose an insurance company that is transparent in its operations and discloses all relevant information about the policy.
7. Seek advice from a qualified Islamic finance expert: If you are unsure about any policy aspect, seek advice from a qualified Islamic finance expert.

By following these steps, you can ensure that you choose a Shariah-compliant life insurance policy that meets your needs and complies with Islamic principles.

Conclusion

Opinions vary about whether all forms of traditional life insurance are haram (non-permissible). Many Muslim scholars permit term life insurance since Takaful, which is the Islamic alternative to traditional insurance, life insurance is not widely available in Canada. Dundas Life works with some top-rated Canadian insurers and can help you secure the right coverage for your family at a great price. 

Frequently Asked Questions (FAQs)

What kind of life insurance can Muslims buy?

Muslims can purchase life insurance that doesn’t go against the principles of Islam. Naturally, Takaful insurance is an obvious choice for practicing Muslims. Takaful insurance is a key component of Shariah-compliant financial services based on Islamic religious law. However, Takaful life insurance (also referred to as Shariah-compliant life insurance) isn’t available in many Western countries.

An alternative to it might be a term life insurance policy, which is regarded by some Muslim scholars as permissible. If you have dependents — spouse, children, aging parents, etc. — and Takaful insurance is not available in your region, consult a Muslim expert regarding your options for life insurance. 

Is whole life insurance and universal life insurance haram? 

Whole life and universal life insurance are often regarded as haram. Both include a cash value component, which relies on interest-based investments rooted in speculative investments regarded as un-Islamic. 

Why isn’t traditional life insurance considered Sharia-compliant?

Islam prohibits transactions that involve gharar (uncertainty). Since life insurance pays for something you have not yet seen and may not even get, it may be regarded as haram. Traditional life insurance may also be considered not Sharia-compliant because some involve interest.

For example, whole life and universal life insurance plans build cash value, which accrues interest or capital gains. What is unambiguously regarded as Sharia-compliant, though, is Takaful. It is an Islamic alternative to insurance and is based on the principles of mutual assistance. However, Takaful is not available in many Western countries. 

What is Islamic Life Insurance?

Shariah-compliant life insurance, called Takaful insurance, is a distinctive type of insurance that aligns with Islamic rules and principles while providing financial security to your family. Takaful insurance follows Sharia law, in contrast to traditional insurance, which may involve practices that Islam prohibits, such as earning interest and gambling. 

Takaful insurance is based on the principle of pooling wealth and paying out to those who suffer an uncertain loss. Islamic laws approve this practice of mitigating loss by pooling resources. By opting for Takaful insurance, people can obtain a life insurance plan that aligns with their religious principles and secure the financial future of their loved ones. 

If you want Takaful insurance, make sure you select a provider that writes Sharia-compliant life insurance policies. Takaful insurance is available in Canada, but it is not widely offered. Speak with an independent insurance broker to determine if Islamic life insurance is available in your region. 

What is a Shariah-compliant investment fund?

A Shariah-compliant investment fund is a financial vehicle that follows guidelines established by Islamic law. These funds are regarded as socially responsible investments since they adhere to Islamic finance guidelines and principles, such as avoiding interest, not investing in businesses that sell pork, alcohol, cigarettes, etc., and maintaining a certain debt-to-equity ratio. 

Is Sharia Compliant Life Insurance Taxable? 

Life insurance premiums, including premiums for Takaful insurance, are typically not tax deductible. The CRA considers premium payments personal expenses; hence, they are ineligible for tax deductions. However, there are some situations in which you can deduct premium payments. Speak with an experienced insurance broker or a financial expert to determine if you can subtract your life insurance premium payments from your total annual income.