Islamic Insurance? Is it real? How to do it?

Devin Halim Wijaya7 October 2024

0 8 3 minutes read

Sharia insurance, or Takaful, is a financial protection solution based on Islamic law (Sharia). It is specifically designed for Muslims who want to ensure their financial dealings comply with Islamic teachings. Sharia insurance emphasizes the principles of mutual assistance (ta’awun) and risk-sharing, providing financial protection without violating Islamic principles. This article will explain how Sharia insurance works, its product types, advantages, and the challenges it faces.

Basic Principles of Sharia Insurance

Sharia insurance operates based on several key principles:

1. Free from Riba, Maisir, and Gharar
In Sharia insurance, riba (interest), maisir (gambling), and gharar (uncertainty) are strictly forbidden. The money contributed by participants, called contributions or tabarru’, is pooled and used to help those in need. This ensures that the system is fair and transparent, with no speculative or unclear transactions.

2. Risk Sharing
Unlike conventional insurance, which transfers the risk from the insured to the insurer, Sharia insurance uses a risk-sharing concept. Here, the risk faced by one participant is shared among all participants. This fosters a sense of solidarity, where everyone supports one another in times of difficulty.

3. Sharia-Compliant Contracts (Akad)
The contracts (akad) in Sharia insurance must follow Islamic principles. Two common contracts used are the tabarru’ (donation) contract for mutual assistance, and tijarah (commercial) contracts used by the company to manage investments.

4. Surplus Underwriting
If there is a surplus of funds after claims are paid during a specific period, the excess is not just kept by the insurance company. Instead, a portion of the surplus is distributed to participants or used for social causes. This contrasts with conventional insurance, where profits usually go to the insurer alone.

Also read:Roles of Custodian Banks in Securities Crowdfunding

Types of Sharia Insurance Products

Sharia insurance offers a variety of products tailored to meet different needs in society:

1. Sharia Life Insurance
This product offers financial protection for families in the event of the participant’s death. The funds provided aim to ease the financial burden on surviving family members.

2. Sharia Health Insurance
This product covers participants from significant medical expenses due to illness or accidents, with all funds managed and invested in a halal (permissible) manner.

3. Sharia Education Insurance
This product helps parents plan for their children’s educational expenses with savings schemes that align with Sharia principles.

4. Sharia Hajj and Umrah Insurance
This product provides coverage for participants planning to perform Hajj or Umrah. If any risks arise during the journey, the costs will be covered by the tabarru’ fund.

Also read:Roles of Custodian Banks in Securities Crowdfunding

Advantages of Sharia Insurance

1. Free from Riba, Maisir, and Gharar
Sharia insurance ensures that all investments are halal, with no involvement of interest, gambling, or speculation, giving participants peace of mind that their financial dealings align with Islamic principles.

2. Solidarity and Mutual Assistance
A unique feature of Sharia insurance is the principle of solidarity. When one participant experiences a loss, the funds from other participants are used to help. This creates a strong sense of community and responsibility.

3. Non-Forfeiture of Funds
Unlike conventional insurance, where premiums are forfeited if no claim is made, the premiums in Sharia insurance are not lost. If there are no claims, the funds are returned at the end of the insurance period or distributed as surplus underwriting.

4. Transparency in Fund Management
Sharia insurance companies are required to manage funds transparently. Participants can see how their contributions are being used, whether for claims or investments.

Challenges of Sharia Insurance

Despite its many advantages, Sharia insurance faces several challenges. One major issue is the lack of public understanding about how Sharia insurance works. Many people are still confused about the differences between Sharia insurance and conventional insurance, or they have doubts about the legitimacy of Sharia insurance products. Additionally, not all Sharia insurance providers offer enough transparency in their fund management, making it essential for participants to choose a reputable company supervised by the National Sharia Council (DSN-MUI).

Conclusion

Sharia insurance is a financial protection solution that aligns with Islamic values. Through principles of mutual assistance and risk-sharing, it provides an ethical alternative for Muslims seeking financial security for themselves and their families. With a wide range of products such as life insurance, health insurance, education insurance, and Hajj and Umrah insurance, Sharia insurance offers comprehensive financial protection. However, it is important to ensure that participants select a reputable company with transparent fund management practices.

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