Introduction
When it comes to the question of taking up traditional insurance, it is the agreement you make between an insurer and a policyholder.
As a policyholder, you make premium remittances to your insurance provider. Here, the premium amounts get remitted once every month, quarter or even annually. In lieu of the premium amount, you get an insurance policy covered. You have life insurance, health insurance, home insurance, business protection insurance, and various other insurance policies. The premium amounts cover the contingency event for which the insurance policy stands chosen for.
With respect to a Takaful policy, this is more of an Islamic policy that we are talking about. Here, the conventional policies do not match. You have a specific set of Islamic principles based on which insurance policies are being curated. And, Islamic investors typically choose Takaful insurance policies that are compliant with their religious practices and ethics. On a similar parlance, let us uncover the core points of differences covering Insurance Vs Takaful. Helping you get started further:
Conceptual understanding vis-a-vis principles
A traditional insurance policy is a contractual agreement between an insurance company and the policyholder.
The policyholder remits premium sums to the insurance company for which the firm compensates the individual against losses or damages for which the insurance policies are covered. The entire industry covering the insurance domain is highly profit-oriented. The risks also get mitigated between the insurers and the policyholders.
Whereas, with respect to Takaful insurance, is an Islamic alternative to the concept of traditional insurance. Here, we have insurance policies that are curated based on mutual assistance and shared responsibility. Therefore, the Takaful insurance completely supports Islamic or Shariah-compliant laws wherein individuals pool their monetary funds to help and support each other in times of need.
Here, we talk about taking up mutual cooperation, shared responsibility and an amicable form of risk sharing as against transferring an element of risk to a commercial entity as such.
Risk Sharing Vs Risk Transfer
In a typical form of conventional insurance, the risk is transferred between the participating entities. Here, the parties are named insured (Policyholders and subscribers) and the insurer (insurance service provider). In case the insured incurs losses or damages, the insured assumes risk and responsibility for the same.
In Takaful Insurance, the risk is equally shared among the participants themselves. Here, each member that belongs to a Takaful insurance scheme pools in his/her contributions to the scheduled fund accounts.
In the case of any member who suffers the claims, the funds are given away to help the person come out of troubled waters. Here, we talk about risk sharing over a risk transfer.
Determining the profit motive
Traditional or conventionally developed insurance companies are usually profit-driven. In other words, they work on a commercial scale to generate profits for the companies the entrepreneurs start. And, the profits are usually shared between insurance subscribers, shareholders, and other stakeholders who are involved in the campaign.
Whereas, in Takaful insurance, the primary motive is not profit-driven or to maximize the scale of profit margins. Here, the intention is to share risks amongst participants so as to help each other during times of crisis.
Here, the contributions of participants are pooled to help an impacted person bear losses or damages. Any surplus amounts or profits that you receive from pooled funds are then given away to the participants themselves.
Ownership and structure
Insurance companies are usually owed by insurers and shareholders who usually expect stable returns on their investment portfolios.
For instance, policyholders who are retirees or pensioners expect interest earnings in the form of coupon payouts for their passive income sources and they may as well expect the payouts to happen monthly or quarterly.
And, for retail investors who take up high-value policies, they may gear up to utilizing a portion of their policy amount for insurance while they might want to capitalize their cash value component towards earning higher returns from investment options like bonds, shares, etc.
In other words, investment-linked insurance policies are what would enthuse the younger generation of retail investors.
Whereas, for Takaful Insurance, the policies are structured in such a way that the participants have every say or right in the decision-making processes of the firms that curate these policies. This is more of a mutual co-operative fund that we are looking at. And, the Takaful insurance aims to fulfill the financial obligations or contingencies on a more equanimous scale indeed.
Compliance with Shariah
Conventional insurance companies are not Shariah-compliant as they deal with interest (Riba) and uncertainty (Gharar). Interest earning and risk mitigation are considered haram according to Islamic laws of financing.
Whereas, the Takaful insurance products are completely based on Islamic principles of financing and are 100 percent Shariah-compliant.
Here risk mitigation or interest-earning are not infused components into the claims handling domain while equal sharing of funds to help the impacted persons is what a Takaful co-op would do to pull people out from troubled waters or contingency situations. It can be a business or a property loss or it can be the loss of a loved one in the family.
As there aren’t elements of interest or gambling risks that are involved in Takaful contracts, you might have a Shariah-compliant board to oversee compliance with these policies.
Surplus sharing
In the case of a typical insurance firm that follows the conventional model or principles of insurance, the surplus money the firm makes is usually shared between shareholders and investors of the firm.
Whereas, with respect to Takaful Insurance, the surplus amounts that are collected from Taful co-operations are utilized to help the impacted person cover his claims or damages. It can be to help a family wherein a loss of life has taken place.
Or, the funds can be utilized to protect a business partner from unforeseen business exigencies or losses. Here, profit-sharing is usually not the motto for participants who are involved in any form of Takaful insurance.
When the Takaful firms still find excess profits or surplus funds, then the funds are utilized to repay the participants back or help them with reduced premium amounts.
The Bottom Line
A conventional insurance works on uncertainties or risks because the insurer doesn’t know if a policy-insured event is going to occur or not. And, the insured policyholders are given interests or coupons for assuming risks thereon.
In typical takaful insurance, the concept does not revolve around uncertainty or gambling (meyser) and interest-earning or riba. The participants pool funds to help the impacted against property damages, business losses or even the emotional losses over the demise of loved ones in the family.
A conventional insurance is not Shariah compliant while a Takaful product has to necessarily be Shariah-compliant and approved by Shariah compliance boards for the products to be considered as acceptable by Islamic investors.
What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
Is Takaful Insurance an Islamic Insurance?
Answer: Yes, Takaful Insurance is an Islam based insurance policy that helps Islamic investors against claims or damages. In Islamic nations like Malaysia, UEA, Dubai, and Arab countries, it is the Takaful insurance that is more popular as against the traditional insurance coverage policies like life insurance or health insurance policies.
How is the fee collection made in a Takaful firm?
Answer: These are donations or contributions we receive from the savings reserve of the participants who operate on the same. The contributions made are utilized to manage the contingencies or exigencies of members who have suffered losses in business or at their families.
This is an arrangement or a distribution program that does not charge interest or business-minded components for participants who contribute to pooled funds. The concept revolves around helping the needy via mutual participation of group members that distribute funds in lieu of the same.
