TAKAFUL INSURANCE 101
Takaful, an arabic word which loosely translates to “mutual agreement” in English, is a type of islamic insurance where a group of people come together and pool in money to provide financial security to one another in the event that any of them suffers from loss or damage.
Driven by the Holy Quran’s verse which asks one to “Help one another in virtue, righteousness and piety”, takaful insurance has been around since as early as the 19th century and continues to protect people with the binding aspects of morality and mutual compliance as guided by the Islamic religious laws.
The Takaful industry in Malaysia is regulated by the Islamic Financial Services 2013 act.
SO HOW DOES IT WORK?
The way Takaful Insurance operates is that people and companies who are concerned about potential risks make regular contributions, also known as donations, which are paid back to them in the event of a loss, and are managed on their behalf by a takaful operator.
Through this cooperative system, members ensure ethical practices while keeping each other accountable and financially secure. Takaful insurance is bound by certain principles which act as a blueprint for members to follow.
The key principles are:
- Members cooperate with each other to obtain mutual benefits
- Member contributions are not considered payments but are called donations or gifts (hibah) to the fund (pool)
- Every member pays a certain amount of contribution to help those who need assistance
- Losses are divided and liabilities spread according to the community pooling system
However, it should be noted that no takaful pool is like the other and it is subject to variations depending on the members . Different types of models also exist in compliance with Islamic social financial principles.
While an endowment fund (waqf) uses irredeemable donations to compensate members of the takaful fund for their loss, on the other hand, in a commercial model, a fund is created with members’ voluntary contributions and compensates them in case of loss, with the said funds being managed by a third party agency.
WHY TAKAFUL INSURANCE?
The most noteworthy aspect of Takaful Insurance is that it is not driven by the motives of maximising profit margins. The purpose of this form of Islamic insurance is simply to ease the financial burden that any contributor of the pool might face in an unfortunate event. There is no monetary imperative and is considered an ethical alternative to the conventional life insurance system.
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.
KEY DIFFERENCES BETWEEN TAKAFUL AND CONVENTIONAL LIFE INSURANCE
Even though essentially both Takaful and conventional life insurance provide the same purpose of rendering individuals with financial security, there are major differences between the two as can be seen below:
|Classification||Takaful Insurance||Conventional Life Insurance|
|Intent||Through Takaful, individuals enter a mutually binding agreement to contribute to a fund that can potentially help any member experiencing an unfortunate situation.||A conventional insurance policy is purchased as a personal financial security for an individual, and the insurance company is the risk bearer.|
|Investment||Takaful investments will follow strict principles with adherence to shia islamic practices. Takaful cannot invest in anything that has elements of being subjected to market risk or the practice of lending money at unreasonably high-interest rates.||The conventional investment units of insurance operate on the principle of “no one size fits all” and will invest based on their assessment of what suits individual profiles.|
|Returns||In the event where members of the takaful pool have, it will be distributed to participants. Takaful operators make money through performance fees or by sharing the surplus.|
Yet since it does not believe in the commercial imperative, the total amount of payment from the surplus that Takaful operators get cannot exceed the amount that is paid to Takaful participants.
|The profits from investments in conventional life insurance will be distributed to both participants and shareholders. Extra money and profits belong to the shareholders of the insurance companies.|
HOW DO I PURCHASE TAKAFUL INSURANCE?
Excellent question! It appears to me that we’ve reached the end yet the most crucial point of this article.
PolicyStreet is a one-stop platform for all your insurance needs. Awarded Financial Advisory and Islamic Financial Advisory approval under Section 11 and 15(1) of the Financial Services Act 2013 by Bank Negara Malaysia, it helps make insurance simple, easy and affordable for you.
With a wide range of options to browse, explore, compare and purchase at the best rates, PolicyStreet also offers Takaful insurance while being mindful of islamic practices and adhering to the religious guidelines which serve as the foundation of Takaful. Policystreet also offers no claim cash back policy, wherein if you don’t make any claims within the coverage period, you will get a certain amount of cash back from us for selected Takaful products.
For more information, check out https://www.policystreet.com/ and enjoy an insurance purchasing experience like never before!