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Insurance Terms

What Is Takaful?

Takaful - Understanding What It Is Blog
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Takaful is an Arabic term which translates to “solidarity” or “mutual guarantee,” wherein members pool their financial resources to safeguard each other against loss or damage. Takaful contract members pool collective financial resources to protect each other. Participants in a takaful contract choose to pay monthly premiums to defend them from specified misfortunes or accidents. Each participant agrees to use the total tips to compensate any group members who incur a covered loss. Takaful dates back to the early days of Islam. It was used as a social insurance practice by community members to pool resources. Sharia or Islamic religious law determines the takaful system’s guidelines and code of conduct. To be specific, takaful adheres to Islamic principles such as welfare, shared responsibility, and cooperation.

How Does Takaful Work?

In contrast to conventional insurance, a takaful contract involves the insurer and the insured. Each member of the Takaful group agrees to contribute or pay a premium regularly. Money is put in Sharia-compliant investments and deposited into individual accounts. When joining a takaful contract, you agree to donate a portion of your account’s funds if another member suffers a loss. Likewise, your fellow members will help cover the loss if you suffer a loss. Takaful can, in practice, look similar to traditional insurance. Let’s say you have a property takaful policy protecting your home. A storm damages your home and makes it uninhabitable. Fortunately, your takaful agreement covered any additional living expenses incurred following your accident. When you file a homeowners insurance claim, you’ll receive compensation for your lodging while repairs are made to your home. It may seem that takaful is the same as conventional insurance, such as homeowners coverage or car insurance. Nonetheless, a takaful agreement is Sharia-compliant, whereas traditional insurance isn’t.

Standard Insurance Violates 3 Concepts In Islam: Gharar, Maysir and Riba

Gharar: Essentially, this is the concept of uncertainty, risk, or fraud involved in financial or business transactions. Conventional insurance consists in paying premiums for a promise that losses are covered. Nevertheless, you may not have a loss or need to file a claim. In this case, Gharar is violated since both parties are uncertain whether or not you will use the insurance policy.

Maysir (Maisir): Maysir, or gambling, is prohibited in Islam since wealth is best derived from productive work and not from winnings from games of chance or luck. In Islam, conventional insurance is often viewed as gambling because the risk and reward are uncertain. In some cases, insurance coverage only lasts a few months before the insured experiences a loss and receives the policy’s total value. Another possibility is that a person may never need their procedure and pay premiums without ever benefitting from them.

Riba: Islamic religious law prohibits riba, “interest” or “usury,” in contracts. Traditional insurance companies invest premiums in interest-paying bonds and funds, which violate guidelines against riba.

What Does Takaful Cover?

Takaful contracts are offered in place of conventional insurance policies to cover many of the same things. The system is usually divided into general takaful and family takaful.

General Takaful: A takaful contract covering your home, business, or car falls under this category. While remaining Sharia-compliant, these takaful groups operate similarly to conventional insurance companies. You can, for example, enter into a personal liability takaful agreement that protects you from lawsuits, like private liability insurance.

Family Takaful: Family Takaful offers similar benefits to life insurance. In a family takaful plan, you and your family are protected from risks such as death and illness for a set period. You can also grow your savings over time. Funds contributed to family takaful plans flow into two separate accounts: a donation to cover takaful group losses and a personal account where funds are invested in Sharia-compliant investments.

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