Are you still trying to understand the Islamic perspective on life insurance?
Are you wondering if it is permissible (halal) or forbidden (haram) according to Islamic principles?
The topic of life insurance and its compatibility with Islamic beliefs has been a subject of debate and discussion among Muslims worldwide.
In this article, we will delve into the question of whether life insurance is halal or haram.
We will explore the different arguments and viewpoints surrounding this issue, considering both the religious and practical aspects.
By the end, you will better understand how life insurance aligns with Islamic principles and whether it is viable for Muslims seeking financial protection.
Let’s get started.
What is Halal, and What is Haram?
“Halal” in the Holy Quran refers to permitted, allowed, legal, or lawful things.
In contrast, its opposite, “Haram”, refers to forbidden, unlawful, illegal, or prohibited things.
In Islam, certain things are deemed halal, while others are declared haram and forbidden.
Prophet Muhammad (PBUH) stated:
“Halal is clear, and the haram (unlawful) is clear. Between the two, there are doubtful matters concerning which people do not know. One who avoids them in order to safeguard his deen (religion) and his honour is safe, while if someone indulges in it, he may be indulging in the unlawful.” (Bukhari)
Islam teaches that Muslims should only engage in halal activities to lead a peaceful life, strengthen their Imaan, and increase their blessings for the day of judgment.
This means avoiding haram activities that are considered sinful or prohibited in Islam. By following this teaching, Muslims strive to live a life that pleases Allah and follows His guidelines.
When it comes to Islamic Finance – whether it’s halal investing, banking, or insurance – a few similarities arise:
Riba
Riba is an Arabic word that means “usury” or “interest” and refers to unfair gains in money or wealth. Islamic finance prohibits the payment or receipt of interest.
Any insurance product that involves an interest-based transaction, such as earning or paying interest on premiums or claim payouts, would be considered haram.
Gharar
Gharar is an Arabic word that means uncertainty, risk, or deception in financial transactions.
Islamic finance discourages excessive uncertainty (gharar) and ambiguity in contracts.
Insurance contracts must be clear and transparent, with all terms and conditions explicitly stated.
Contracts that involve excessive ambiguity or uncertainty are considered haram.
The Quran and the hadith provide evidence for the prohibition of gharar and warn against its harmful consequences.
Maysir
Maysir is also an Arabic terminology; its literal meaning is gambling or a game of chance. Earnings through maysir have been strictly declared forbidden for Muslims.
Insurance premiums should not be treated as a form of gambling but rather as a means of managing risk and providing protection.
Any earning from companies whose business models are based on maysir is forbidden in Islam.
Types of Life Insurance
Term Life Insurance
Term insurance is a type of life insurance that provides pure protection coverage for a specific duration.
A basic plan may include total and permanent disability, death, and terminal illness coverage.
Riders may be added as additional coverage covering you for critical illness, early critical illness, premium waivers, and more.
If the insured person passes on or gets diagnosed with a terminal illness during the policy tenure, the sum insured will be given as a lump sum.
A term insurance plan carries the following advantages for you:
- You will find term life insurance plans easier to understand. There are no frills attached.
- The term life insurance will neither build up any cash value nor provide you with any investment returns. Therefore, it is cheaper as compared to other forms of life insurance.
Term life insurance has the following disadvantages:
- This type of policy expires after your plan ends.
- The policy carries no cash value. In the unfortunate event of death or disability, you will get the sum insured. Still, if the term ends without tragic events, you will not get any monetary value (not that you should wish for something like this).
Whole life insurance
With a whole life insurance policy, you will get protection for your entire life as long as the premiums are paid.
The main benefit of the option for the whole life insurance policy is wealth accumulation. It is known as “Cash Value”.
The accumulated value depends on 2 portions. The 1st portion is the guaranteed capital and interest upon surrender.
The 2nd portion depends on your performance in the participating fund.
Whole life insurance brings you the following benefits:
- Accumulation of wealth in the shape of cash value.
- Gives you coverage for a lifetime.
Whole life insurance is more expensive than term life insurance, which is the only downside when comparing the 2.
Is life insurance halal or haram?
Generally, Islamic Scholars have argued that insurance policy is halal as it provides financial protection to the policyholders.
You will find mixed fatwas and arguments from Islamic scholars if you search the question online.
When selecting a halal insurance plan, it is essential to consider critical factors.
The best practice is to focus on and study the elements that make insurance or any financial investment/transaction halal or haram in Islam, e.g. interest, uncertainty, gambling, etc.
Let us dive a little deeper into how to assess the acceptability of a certain type of insurance in Islam.
How to determine if life insurance is halal or haram?
Insurer’s investment of pool of funds
While selecting the suitable insurance policy, you should assess that the pool of funds gathered by the insurance provider is invested in companies/industries involved in producing halal items or providing halal services.
Examples of halal industries are
- Real estate
- Transportation and shipping
- Medicine
- Furniture, etc.
Examples of haram industries are:
- Alcohol
- Processing of haram meat, i.e. pork
- Casinos
- Pornography, etc.
If the insurance provider invests in Shariah-compliant funds/stocks that avoid interest-bearing loans, bonds, stocks, and derivatives, the investment (thus, the insurance) can be considered acceptable or halal.
Transparency and Fairness
Insurance policies where terms and conditions are clearly spelt out, and no hidden clauses and fees/deductions are involved bring an insurance policy closer to becoming halal.
The principles of Shariah finance prohibit investing in stocks with gharar due to potential risks and deception.
Exploitation of the insured party
Islam represents just and honest behaviour. Therefore, if the insurance policy exploits the person insured, it shall not be deemed halal.
Policyholders may be exploited by charging unfair or excessive premiums by insurance companies.
One of the most common ways policyholders can be exploited is when insurance companies wrongfully deny legitimate claims.
This can happen through misinterpretation of policy terms, unjustified delays, or other bad-faith practices aimed at avoiding payouts and falling under the category of gharar.
Insurers may engage in deceptive marketing or misrepresent the benefits and terms of their policies to entice customers to purchase coverage.
Compliance with Shariah Board
Islamic insurance companies often have a Shariah Board or council of Islamic scholars who review and ensure that their products and operations comply with Islamic principles.
Compliance with the guidance provided by the Shariah Board is essential for an insurance plan to be considered halal.
Therefore, always look for Shariah Board approval when considering an insurance plan.
Is term life insurance halal or haram?
Whether term life insurance is halal (permissible) or haram (forbidden) in Islam is a subject of debate among Islamic scholars, and opinions may vary depending on the specific circumstances and terms of the insurance policy.
Arguments in Favour of Term Life Insurance (Halal):
Some argue that term life insurance can serve as a legitimate means to mitigate financial risks, especially for the deceased’s family.
In the event of the policyholder’s death during the term of the policy, the beneficiaries receive a death benefit that can help them cover living expenses, debts, and other financial obligations.
Term life insurance can provide financial security for the policyholder’s family, ensuring that they have sufficient resources to maintain their quality of life, education, and basic needs if the breadwinner passes away prematurely.
Advocates for term life insurance argue that it is essentially a contract where you pay premiums for a specified period, and the insurance company provides a death benefit if you pass away during that term.
This contractual agreement is not fundamentally different from other permissible contracts in Islam.
Arguments Against Term Life Insurance (Haram):
Islamic finance principles require contracts to be free from excessive uncertainty or ambiguity (gharar).
Some argue that insurance contracts, including term life insurance, can be inherently uncertain in terms of the timing and occurrence of the insured event (i.e., death).
This is especially a concern when term insurance only provides coverage up to a certain age – bringing about uncertainty and the possible element of gambling into the picture.
Critics of term life insurance suggest that there are alternative, Sharia-compliant mechanisms for providing financial support to one’s family in case of death, such as setting up a family trust, mutual assistance funds, or community-based cooperative schemes.
However, given that there are new term plans that cover you up until you are 99/100 years old, the elements of uncertainty and gambling are greatly reduced, especially when you consider average lifespan.
For example, the average lifespan in Singapore is 87 years. If a Muslim gets themselves covered up to 99/100, would this still be considered gharar or maysir – given that it’s based on statistics?
I would love to give you an answer, but I couldn’t find an answer myself.
Speaking of getting coverage for up to 99/100, let’s talk about whole life insurance, which either covers you for up to 99/100 or until you pass on.
Is whole life insurance halal or haram?
The permissibility of whole life insurance in Islam, like term life insurance, is a topic of debate among Islamic scholars, and opinions on this matter may differ depending on various factors and interpretations of Islamic principles.
Arguments in Favour of Whole Life Insurance (Halal):
Some proponents argue that whole life insurance can serve as a legitimate means to mitigate financial risks, particularly for the deceased’s family.
Like term life insurance, it provides a death benefit that can support the beneficiaries in covering living expenses, debts, and other financial obligations.
And with coverage for your entire life, the elements of maysir and gharar are minimised or arguably removed.
Whole life insurance policies often have a savings or investment component that accumulates cash value over time.
Some scholars argue that this feature can be seen as a form of forced savings, which is permissible in Islam.
Whole life insurance can offer long-term financial security for the policyholder’s family, ensuring that they have sufficient resources to maintain their quality of life, education, and basic needs if the breadwinner passes away prematurely.
Advocates for whole life insurance assert that it essentially involves a contractual agreement where premiums are paid in exchange for a death benefit and potential cash value accumulation.
This contractual aspect is not inherently haram as long as it complies with Islamic principles.
Arguments Against Whole Life Insurance (Haram):
One of the primary concerns among those who consider whole life insurance as haram is the potential involvement of riba (interest) in the premiums or investment aspects of the policy.
If the insurance company invests in interest-bearing instruments, it may raise issues of impermissibility.
Furthermore, the investment component of whole life insurance might invest in haram industries – making it haram.
Like term life insurance, Islamic finance principles require contracts to be free from excessive uncertainty or ambiguity (gharar).
Some argue that insurance contracts, including whole life insurance, can be inherently uncertain in terms of the timing and occurrence of the insured event (i.e., death).
For example, no one knows when they will pass on. Purchasing life insurance can be argued as a gamble on when you think you’ll pass, making it haram.
Critics of whole life insurance suggest that there are alternative, Sharia-compliant mechanisms for providing financial support to one’s family in case of death, such as setting up a family trust, mutual assistance funds, or community-based cooperative schemes.
Some whole life insurance policies may come with high administrative fees and commissions, which can be seen as excessive and against the principles of fairness in Islamic finance.
Again, there are no conclusive answers, so it really depends.
Since most of our readers are based in Singapore (so are we), let me conceptualise whether life insurance is halal in Singapore.
Fatwas offered by the Islamic Religious Council of Singapore
In addition to ensuring that Singapore’s Muslim community’s many and varied interests are addressed, the Islamic Religious Council of Singapore is also responsible for issuing religious guidance (fatwa) to the community.
Fatwa, which refers to Islamic legal rulings, plays a crucial role in the lives of Muslims.
With the advancements in science and technology and the ever-changing realities of life in a dynamic society like Singapore, new questions have arisen that require solutions through a fatwa.
While insurance plans are generally considered halal due to their intrinsic benefits, Muslim scholars worldwide have differing opinions on insurance – it is permissible to some to protect Muslims but prohibited to others due to riba and gharar in fund accumulation and investment.
The Islamic Religious Council of Singapore has offered the following 2 fatwas on the topic of insurance (not just life insurance):
- It is halal for the insured to have a revocable nomination attached to the insurance policy. The fatwa committee decided that having a revocable nomination is a contemporary hibah (gift) form.
- Islamic law recognises insurance managed by a cooperative company of members for mutual assistance and services as benevolent cooperation.
- The fatwa committee also determined that cooperative insurance covering matters such as unemployment, old age, and accidents at work is permissible for the general public.
- Insurance managed by private companies aimed at personal profit or the benefit of a few individuals, generally at the expense of others, does not receive recognition from scholars.
The Fatwa Committee recommends that each person choose the insurance plan that aligns with their beliefs regarding insurance.
It is essential to study the key elements of an insurance policy carefully before opting for a plan to determine if it is halal or haram.
If you’re not from Singapore, it’s also important to look into the fatwas by your country/region, as these might differ.
What is Takaful Insurance, and is it the answer?
Takaful is marketed as an alternative to conventional insurance plans and is considered to be according to the Islamic way of conducting a financial transaction.
In takaful arrangements, members contribute to a pool of funds to receive help in times of uncertainty, promoting cooperation for the common good.
The contributions from the members are invested in investment schemes that adhere to the Sharia Laws, often approved by the Shariah Board.
The earnings and the losses from the investments are distributed among the members equally or as per the mutually agreed profit and loss sharing ratios.
The profit earning is not guaranteed in a takaful arrangement.
In case no one faces uncertainty, the money is usually distributed among the members, unlike the conventional term insurance, which does not provide payouts if uncertainty does not happen.
Takaful is another topic we’ll cover another day, so be sure to check if we’ve published it.
Conclusion
In conclusion, whether life insurance is halal or haram in Islam remains a complex and debated issue.
Determining its permissibility usually hinges on various factors, including the specific type of insurance (term or whole life), the terms of the policy, and the underlying principles of Islamic finance.
While some scholars argue that life insurance, whether term or whole life, can serve as a legitimate means of risk mitigation and financial protection for one’s family, others raise concerns about potential involvement in riba (interest), excessive uncertainty (gharar), and the availability of alternative Sharia-compliant mechanisms.
If you were to ask me, I think term life insurance that covers you up till you’re 99 years old would reduce/remove elements that make life insurance haram.
Whole life insurance, if invested in Shariah-compliant investments, are even better options as it covers me until I pass on while growing my money the halal way.
The only challenge is that whole life insurance will generally have non-permissible investments, especially in Singapore. Based on my reviews of life insurance policies, insurers will not share which funds they specifically invest in – causing transparency issues.
So unless there are whole life policies solely designed to be halal, it’s difficult to argue for whole life insurance, making term to 99 policies the only type of life insurance that is arguably not haram.
Despite this, I’m not a Muslim scholar nor a finance expert, so take my thoughts as just opinions.
The best way for you to make an informed choice is to consult your local imams, religious teachers, or Islamic finance experts.
