Muslim Knowledge Guide China: Is Life Insurance Halal? Term Life, Whole Life and Takaful Explained
Reposted from the web
Summary: This Islamic finance article explains Ibrahim Khan’s view on whether life insurance is halal, comparing term life insurance, whole life insurance, investment elements, and takaful-style alternatives in clear English.
Not long ago, I translated a Sharia article about insurance by Ibrahim Khan published on Islamic Finance Guru (www.islamicfinanceguru.com): Ibrahim Khan: Insurance—Is it halal? This was a selection of Sharia viewpoints discussing insurance from a macro perspective. Ibrahim Khan believes that the vast majority of insurance is lawful, but one more complex category requires separate discussion: life insurance.
The form of life insurance in our country is basically the same as abroad, divided into term life insurance and whole life insurance. The design principles of these two types of life insurance are slightly different. Because whole life insurance has a savings and value-added function, it is suspected of involving interest, and interest is prohibited by Sharia. This article will analyze in depth whether life insurance complies with Sharia based on its design principles.
Life Insurance: is it haram or halal?
(Life Insurance: Is it halal?)
Author: Ibrahim Khan
Translated by Yahya
About the author: Ibrahim Khan holds a bachelor's degree in Philosophy, Politics, and Economics from the University of Oxford and a master's degree in Islamic Finance from the Al Salam Institute. He previously worked as a private equity/venture capital lawyer in New York City and is a co-founder of Islamic Finance Guru.
Main text: In my previous article, "Ibrahim Khan: Insurance—Is it halal?" I discussed some of the main arguments for why insurance is lawful from a Sharia perspective. However, at the end of that article, I promised to write a follow-up article about "life insurance"
because I noticed that life insurance is different from commonly understood insurance products. To prevent misunderstandings, I need to elaborate further.
Well, please read on.
In short, life insurance is divided into two main categories. One is life insurance used for protection, and the other is used as an investment and financial management tool. The former is undoubtedly lawful (based on all the arguments put forward in the previous article), while the latter is only allowed to be purchased if the underlying investment is lawful.
The image shows a poster for Bupa Middle East, a world-class high-end medical insurance brand.
Types of life insurance
There are many types of life insurance, but fundamentally, they all fall into one of the following two areas.
1. Term life insurance
Term life insurance is a type of protection insurance. Under the terms of a term life policy, if you die within a set period, the insurance company pays a benefit to your family. For example, if you are 25 years old and buy a policy for 10 pounds a month, it promises to pay your family 100,000 pounds if you pass away before you turn 50. Here is what happens:
a) Either you pass away before age 50 and your family gets 100,000 pounds; or,
b) You live past age 50 and the policy ends. The insurance company simply keeps the 3,000 pounds in premiums you paid up to that point, just like they keep your annual car insurance premiums.
2. Whole life insurance
Whole life insurance combines protection insurance with an investment tool. Again, imagine you buy a whole life policy at age 25 for 100 pounds a month, and you will have paid at least 35,000 pounds in premiums by age 50. If you pass away before age 50, the insurance company pays a 35,000 pound benefit to your family. But if you live longer and earn good investment returns, you could receive a payout of over 50,000 pounds by the time you are 50.
Besides thinking about how to leave an inheritance for your loved ones after you pass away, you should also consider organizing your Islamic will. People often lose up to 9,700 pounds to inheritance tax when they die without a will. More importantly, a will is vital for Muslims so that your estate is distributed according to Islamic law. If you live in the UK, be sure to check the Islamic Finance Guru (IFG) website for guidance on wills and get your Islamic will sorted in 30 minutes.
Islamic perspective: Term life insurance clearly fits with all other types of protection insurance discussed in previous articles. The uncertainty prohibited in Hadith is not the same as the uncertainty involved in modern insurance. The many positive aspects of insurance outweigh the negative ones. If we accept that Muslim insurance follows Islamic law, we must admit that traditional insurance also follows it, because there is almost no real difference between the two. However, there may be unique objections to life insurance that do not apply to other types of insurance, so let us analyze if these arguments are convincing.
One specific argument against life insurance is that it differs from other types because it aims to provide coverage for the loss of life and the livelihood of the family after a person dies.
Ibrahim said: My Lord is the One who gives life and causes death. [Quran 2:258]
He gave you life, then He will cause you to die, and then He will bring you back to life. [Quran 22:66]
Do not kill your children for fear of poverty, for I provide for them and for you. [17:31]
Umar said: I heard the Messenger of Allah (may Allah bless him and grant him peace) say: If you rely on Allah as you should, He will provide for you just as He provides for the birds. They go out hungry in the early morning and return full in the evening. [Tirmidhi Hadith]
Opponents argue that buying life insurance goes against the decree of Allah, because Allah specifically mentions that life and livelihood are things we should not worry about, as everything is in His control. But this argument is weak, and I have a clear rebuttal: Allah says He controls life and death and provides food, but He does not want us all to sit idle or avoid taking any precautions. Do not throw yourselves into destruction... [Quran 2:195]
Anas ibn Malik said: A man from the Ansar came to the Prophet, and the Prophet (may Allah bless him and grant him peace) said: Do you have nothing in your house? The man said: Yes, I only have a piece of cloth, part of which I wear and part of which I spread on the ground, and a wooden bowl for drinking water. The Prophet said: Bring them to me. The man brought these things to him, and the Prophet held them in his hand and said, 'Who will buy these?' Someone said, 'I will buy them for one coin.' The Prophet asked two or three more times, 'Who will offer more than one coin?' Someone said, 'I will buy them for two coins.' He sold them for two coins and the Prophet said, 'Use one coin to buy food for your family.' Then buy an axe and bring it to me. The man brought it to him. The Prophet fixed a handle on it with his own hands and said, 'Go gather firewood and sell it, and do not let me see you for two weeks.' The man went to gather firewood and sold it. He earned ten coins and used them to buy clothes and food. The Prophet said, 'This is better for you than begging, as begging will be a stain on your face on the Day of Resurrection.' Begging is only allowed for three types of people: those in extreme poverty, those burdened with heavy debt, and those who must pay a high price. [Sunan Abu Dawood]
Abdullah ibn Umar (may Allah be pleased with him and his father) reported that the Prophet (peace and blessings of Allah be upon him) said, 'Any Muslim who has property to bequeath should not let two nights pass without writing a will.' (Sahih al-Bukhari) Islam teaches us to take all necessary precautions to care for our families, even after we die. In fact, Islam forbids leaving more than one-third of an estate to anyone outside of the deceased's immediate family.
Arguments against this are based on the same reasoning that all other types of protective insurance are not allowed, claiming that because Allah is the 'Healer' of the earth and the 'Protector' of the believers, one should not buy medical insurance. Following this view, one should not go to the hospital or take medicine either. Another reason people oppose life insurance is that Allah controls life and death, so Islam does not allow us to trade with it. I have two direct counterarguments: (1) In life insurance, we are not buying or selling our lives, but rather reducing the risk of financial loss from death. Also, Allah says in the Quran: Allah has purchased from the believers their lives and their properties in exchange for Paradise. [Quran 9:111]
Clearly, we do have a certain level of ownership over our lives. To that extent, we can use our lives and bodies in ways we choose.
If you think I missed any major objections to life insurance, I would love to hear your further arguments (leave a comment below the article).
Islamic perspective: Whole life insurance is fine in principle, but in practice, most people living in the West face a problem. Whole life insurance is seen as an investment in the West, and the legitimacy of an investment depends on the underlying assets.
In the Middle East, if you choose to work with a Muslim insurance company, that company is restricted by its internal policies to only invest in Sharia-compliant assets, so this is not a problem.
However, in the UK, the issue is a bit tricky because traditional insurance companies will almost certainly put a large amount of premiums into fixed-income (interest-based) products, but we may have two ways to handle this:
(1) Either get a policy where a person can decide which underlying investments the policy invests in (and then choose all Sharia-compliant assets); or (2) a person chooses an investment product where most underlying assets are Sharia-compliant, and then gives away the non-Sharia-compliant portion to charity. I am not a big fan of the latter option because whole life insurance is certainly not a necessity like a pension, so Muslims can still find other Sharia-compliant investment products as alternatives.
Conclusion
I feel the arguments above are already very clear, so I will not repeat them here. In short, if you are considering life insurance, check whether it is term insurance or whole life insurance. If it is term insurance, my view is that it is okay to buy. If it is whole life insurance, my view is that if you can choose Sharia-compliant investments, that is also fine, but in reality, this can be difficult in the West.
I think we at IFG should look deeper in the coming months at what long-term investment options follow halal rules. Insha Allah, we will soon start a series of reviews on various companies, funds, and startups that claim to be halal, and we have actually already started doing this.
Is it better to remove the non-halal parts from investment returns and keep the rest? Does this count as avoiding responsibility?
I look forward to your feedback in the comments.
Summary: This Islamic finance article explains Ibrahim Khan’s view on whether life insurance is halal, comparing term life insurance, whole life insurance, investment elements, and takaful-style alternatives in clear English.
Not long ago, I translated a Sharia article about insurance by Ibrahim Khan published on Islamic Finance Guru (www.islamicfinanceguru.com): Ibrahim Khan: Insurance—Is it halal? This was a selection of Sharia viewpoints discussing insurance from a macro perspective. Ibrahim Khan believes that the vast majority of insurance is lawful, but one more complex category requires separate discussion: life insurance.
The form of life insurance in our country is basically the same as abroad, divided into term life insurance and whole life insurance. The design principles of these two types of life insurance are slightly different. Because whole life insurance has a savings and value-added function, it is suspected of involving interest, and interest is prohibited by Sharia. This article will analyze in depth whether life insurance complies with Sharia based on its design principles.
Life Insurance: is it haram or halal?
(Life Insurance: Is it halal?)
Author: Ibrahim Khan
Translated by Yahya
About the author: Ibrahim Khan holds a bachelor's degree in Philosophy, Politics, and Economics from the University of Oxford and a master's degree in Islamic Finance from the Al Salam Institute. He previously worked as a private equity/venture capital lawyer in New York City and is a co-founder of Islamic Finance Guru.
Main text: In my previous article, "Ibrahim Khan: Insurance—Is it halal?" I discussed some of the main arguments for why insurance is lawful from a Sharia perspective. However, at the end of that article, I promised to write a follow-up article about "life insurance"
because I noticed that life insurance is different from commonly understood insurance products. To prevent misunderstandings, I need to elaborate further.
Well, please read on.
In short, life insurance is divided into two main categories. One is life insurance used for protection, and the other is used as an investment and financial management tool. The former is undoubtedly lawful (based on all the arguments put forward in the previous article), while the latter is only allowed to be purchased if the underlying investment is lawful.
The image shows a poster for Bupa Middle East, a world-class high-end medical insurance brand.
Types of life insurance
There are many types of life insurance, but fundamentally, they all fall into one of the following two areas.
1. Term life insurance
Term life insurance is a type of protection insurance. Under the terms of a term life policy, if you die within a set period, the insurance company pays a benefit to your family. For example, if you are 25 years old and buy a policy for 10 pounds a month, it promises to pay your family 100,000 pounds if you pass away before you turn 50. Here is what happens:
a) Either you pass away before age 50 and your family gets 100,000 pounds; or,
b) You live past age 50 and the policy ends. The insurance company simply keeps the 3,000 pounds in premiums you paid up to that point, just like they keep your annual car insurance premiums.
2. Whole life insurance
Whole life insurance combines protection insurance with an investment tool. Again, imagine you buy a whole life policy at age 25 for 100 pounds a month, and you will have paid at least 35,000 pounds in premiums by age 50. If you pass away before age 50, the insurance company pays a 35,000 pound benefit to your family. But if you live longer and earn good investment returns, you could receive a payout of over 50,000 pounds by the time you are 50.
Besides thinking about how to leave an inheritance for your loved ones after you pass away, you should also consider organizing your Islamic will. People often lose up to 9,700 pounds to inheritance tax when they die without a will. More importantly, a will is vital for Muslims so that your estate is distributed according to Islamic law. If you live in the UK, be sure to check the Islamic Finance Guru (IFG) website for guidance on wills and get your Islamic will sorted in 30 minutes.
Islamic perspective: Term life insurance clearly fits with all other types of protection insurance discussed in previous articles. The uncertainty prohibited in Hadith is not the same as the uncertainty involved in modern insurance. The many positive aspects of insurance outweigh the negative ones. If we accept that Muslim insurance follows Islamic law, we must admit that traditional insurance also follows it, because there is almost no real difference between the two. However, there may be unique objections to life insurance that do not apply to other types of insurance, so let us analyze if these arguments are convincing.
One specific argument against life insurance is that it differs from other types because it aims to provide coverage for the loss of life and the livelihood of the family after a person dies.
Ibrahim said: My Lord is the One who gives life and causes death. [Quran 2:258]
He gave you life, then He will cause you to die, and then He will bring you back to life. [Quran 22:66]
Do not kill your children for fear of poverty, for I provide for them and for you. [17:31]
Umar said: I heard the Messenger of Allah (may Allah bless him and grant him peace) say: If you rely on Allah as you should, He will provide for you just as He provides for the birds. They go out hungry in the early morning and return full in the evening. [Tirmidhi Hadith]
Opponents argue that buying life insurance goes against the decree of Allah, because Allah specifically mentions that life and livelihood are things we should not worry about, as everything is in His control. But this argument is weak, and I have a clear rebuttal: Allah says He controls life and death and provides food, but He does not want us all to sit idle or avoid taking any precautions. Do not throw yourselves into destruction... [Quran 2:195]
Anas ibn Malik said: A man from the Ansar came to the Prophet, and the Prophet (may Allah bless him and grant him peace) said: Do you have nothing in your house? The man said: Yes, I only have a piece of cloth, part of which I wear and part of which I spread on the ground, and a wooden bowl for drinking water. The Prophet said: Bring them to me. The man brought these things to him, and the Prophet held them in his hand and said, 'Who will buy these?' Someone said, 'I will buy them for one coin.' The Prophet asked two or three more times, 'Who will offer more than one coin?' Someone said, 'I will buy them for two coins.' He sold them for two coins and the Prophet said, 'Use one coin to buy food for your family.' Then buy an axe and bring it to me. The man brought it to him. The Prophet fixed a handle on it with his own hands and said, 'Go gather firewood and sell it, and do not let me see you for two weeks.' The man went to gather firewood and sold it. He earned ten coins and used them to buy clothes and food. The Prophet said, 'This is better for you than begging, as begging will be a stain on your face on the Day of Resurrection.' Begging is only allowed for three types of people: those in extreme poverty, those burdened with heavy debt, and those who must pay a high price. [Sunan Abu Dawood]
Abdullah ibn Umar (may Allah be pleased with him and his father) reported that the Prophet (peace and blessings of Allah be upon him) said, 'Any Muslim who has property to bequeath should not let two nights pass without writing a will.' (Sahih al-Bukhari) Islam teaches us to take all necessary precautions to care for our families, even after we die. In fact, Islam forbids leaving more than one-third of an estate to anyone outside of the deceased's immediate family.
Arguments against this are based on the same reasoning that all other types of protective insurance are not allowed, claiming that because Allah is the 'Healer' of the earth and the 'Protector' of the believers, one should not buy medical insurance. Following this view, one should not go to the hospital or take medicine either. Another reason people oppose life insurance is that Allah controls life and death, so Islam does not allow us to trade with it. I have two direct counterarguments: (1) In life insurance, we are not buying or selling our lives, but rather reducing the risk of financial loss from death. Also, Allah says in the Quran: Allah has purchased from the believers their lives and their properties in exchange for Paradise. [Quran 9:111]
Clearly, we do have a certain level of ownership over our lives. To that extent, we can use our lives and bodies in ways we choose.
If you think I missed any major objections to life insurance, I would love to hear your further arguments (leave a comment below the article).
Islamic perspective: Whole life insurance is fine in principle, but in practice, most people living in the West face a problem. Whole life insurance is seen as an investment in the West, and the legitimacy of an investment depends on the underlying assets.
In the Middle East, if you choose to work with a Muslim insurance company, that company is restricted by its internal policies to only invest in Sharia-compliant assets, so this is not a problem.
However, in the UK, the issue is a bit tricky because traditional insurance companies will almost certainly put a large amount of premiums into fixed-income (interest-based) products, but we may have two ways to handle this:
(1) Either get a policy where a person can decide which underlying investments the policy invests in (and then choose all Sharia-compliant assets); or (2) a person chooses an investment product where most underlying assets are Sharia-compliant, and then gives away the non-Sharia-compliant portion to charity. I am not a big fan of the latter option because whole life insurance is certainly not a necessity like a pension, so Muslims can still find other Sharia-compliant investment products as alternatives.
Conclusion
I feel the arguments above are already very clear, so I will not repeat them here. In short, if you are considering life insurance, check whether it is term insurance or whole life insurance. If it is term insurance, my view is that it is okay to buy. If it is whole life insurance, my view is that if you can choose Sharia-compliant investments, that is also fine, but in reality, this can be difficult in the West.
I think we at IFG should look deeper in the coming months at what long-term investment options follow halal rules. Insha Allah, we will soon start a series of reviews on various companies, funds, and startups that claim to be halal, and we have actually already started doing this.
Is it better to remove the non-halal parts from investment returns and keep the rest? Does this count as avoiding responsibility?
I look forward to your feedback in the comments.
