Insurance: A review on legitimacy of
general and life insurance
Q283 :Insurance: A review on legitimacy of
general and life insurance
A283 : Quite some time back, I wrote an
answer encouraging a reader to stop his life insurance policy.
Two persons working in the field of insurance for a number of
years have provided me with points about insurance policies and
why they believe them to be Islamically acceptable. This has
prompted me to study the question of insurance at a great depth
and I discussed the subject with a number of scholars and
referred to much that has been written on it. I have also
received a number of letters on general insurance and I am
discussing the subject at length hoping that this netprehensive
answer will serve as an answer to every reader who has put to
me a question on insurance. I am grateful for the information
provided which was of benefit in arriving at the conclusion I
am now explaining. An insurance policy is a contract which
aims at providing netpensation for potential loss or damages
that are specified in the contract. The insured pays premiums
either by installments or in a lump sum, in order to have
insurance cover for a specified period of time. Should the loss
or damage occur, the insured makes a claim against the other
party which is normally the insurance netpany and he receives
the netpensation to which he is entitled under the terms of the
policy. It is highly significant that an insurance netpany
undertakes its business for profit. The risks against which
insurance cover can be given are wide-ranging and vary in
nature from theft to loss of goods during transportation to
waste of food kept in a freezer due to a power cut or power
failure. There is also the well-known life insurance which
deserves to be mentioned separately. A form of insurance which
has been made obligatory in most countries is that which
concerns driving and motor vehicles where the law of most
countries requires drivers to have at least a third party
insurance policy before they drive. Since we have discussed car
insurance recently [Read page 131], we will not refer to it
here. The Fiqh Counsel of the Muslim World League ruled in
favor of what it called the “cooperative insurance”, which
visualizes a group of people working in the same type of
business establishing a joint fund, to which everyone of them
contributes. The purpose of the fund is to netpensate any one
of them who suffers specific losses, due to unforeseen
circumstances. There is no element of profit in this type of
insurance. If the fund is established for a specific period of
time, then when that time lapses, the money still available in
the fund is given back to the members in the same percentage as
of their contributions. When we look at what insurance
netpanies do, we find that they work on the same principle, but
the fund they establish out of the premiums they charge to
their clients is much greater and the risks covered are more
wide ranging. No money is returned to clients at the end of the
term of agreement. The premium is simply paid in return for the
insurance cover. The netpany makes profits in as much as the
premiums it charges exceed the claims it has to pay out. There
is no doubt that the objective of the insurance is sound,
legitimate and wins the approval of Islam. It seeks to reduce
or redress the effects of a natural or man-made disaster.
Hence, it is in effect a regularization of the cooperation
which is required to be shown by the Muslim netmunity when
unfortunate circumstances befall its members. For an insurance
netpany to extend such a service and make it available to a
large number of people requires a great deal of managerial and
administrative work. It has to employ a sufficient work force
to look after the various aspects of its work and it has to
have offices, stationery, equipment, etc. To do all this, and
to make profit as a result is perfectly legitimate. From the
above we conclude that the concept of insurance is sound and
its organization through an insurance netpany is acceptable.
Hence, there is nothing wrong in principle in seeking insurance
cover against potential risks that a person may run with regard
to himself, his property or his business. Having said that, I
must point out that many legitimate or permissible things can
be used for unacceptable purposes. When this happens, we
pronounce something as forbidden, not because it is sinful in
nature, but because of its usage for the wrong purpose. It is
important, therefore, to look at how insurance works in
practice and to try to find out why many scholars remain
opposed to it. One of the objections frequently raised,
suggests that insurance is a form of gambling. It has been
suggested that insurance netpanies determine premiums on the
same principles and rules which are used by gambling netpanies
in quoting prices. It may be so, but the use of mathematical
rules and principles for a forbidden purpose does not make it
forbidden to use them for a legitimate purpose. Moreover,
gambling is totally different from insurance. Gambling is a
moral evil which has very adverse effects on the gambler and
his family. A gambler may lose all his fortune in one unlucky
night in a casino. There is only one winner in gambling which
is the owner of the casino or the betting shop. All their
clients are losers. Moreover, a gambler always lives in fear of
losing all his wealth. His family runs the risk of total loss.
In insurance, the reverse is true. The insured has the peace of
mind derived from the knowledge that should a catastrophe take
place, he will be indemnified. Moreover, the benefits in
insurance are mutual. All those who take insurance policies as
well as the insurance netpany benefit by the insurance schemes.
Another objection suggests that insurance is a form of betting.
The insured person places his premium and hopes for the best.
If nothing happens to him, or to his property, he simply loses
his premium, in the same way as a betting person loses his bet.
There is a big difference between the two. When a person places
a bet he hopes to win because that win will give him a net
innete. A person taking insurance cover pays his money for
security. He prefers that nothing happens to him or to his
property which would require him to make a claim against the
insurance netpany. He prefers safety for himself and for his
property. If something happens and he has to make use of his
insurance policy, he simply gets a reduction in the losses he
has suffered. Take for example a person who has insured his
house contents against theft, but burglars break in and get
away with much of his valuables. He will probably receive the
value of what he has lost, but he would have to lose time in
buying replacements. Moreover, some of these valuables may have
a sentimental value which he can never replace. Some people
have suggested that an insurance policy represents a challenge
to Allah’s will. A good believer, it is argued, accepts
whatever calamity befalls him as an act of Allah and submits to
Allah’s will in all circumstances. While this is certainly true
of a good believer, an insurance policy does not attempt to
prevent Allah’s will. By taking an insurance policy, a person
only seeks to reduce the effects of Allah’s will, not to
prevent it. Sheikh Mustapha Azzarqa, professor of Islamic law,
likens insurance to the iron bars placed on top of a building
to divert a thunderbolt away from it. When the architect
places these iron bars, the thought of preventing the
thunderbolt happening does not occur to him at all. He is only
trying to save the building in which he has put so much effort
from being destroyed by it. This he achieves through diverting
its direction, taking it deep underground. A more serious
objections is that which groups insurance with sales in which
risk is a basic element. These are known in Islamic law as
“gharar” sales. Examples of such deals is to sell the fruits of
trees at the beginning of the season when their quality [or
quantity] cannot be established yet. All such sales are
forbidden in Islam, because they involve risk to the buyer and
there may be an element of deception on the part of the seller.
It is also forbidden to sell an unidentified object as in the
case when someone sells a sheep from a flock without specifying
or identifying it. When we consider this particular aspect, we
find that Islam has outlawed deeds which involve an exceptional
or a serious element of risk. If we were to say that any deal
which has even the slightest element of risk is forbidden, then
we will block most business deals. When the risk element is of
normal or reasonable proportions, a deal may go through. In
insurance, what a person buys when he seeks insurance cover is
not the amount of netpensation he will receive when something
happens to him or to his property. What he buys is peace of
mind. This is tangible return for the money he pays. Once cover
is extended, the insured has this peace of mind which, to him,
is a fair return on his investment. If something happens to him
or to his property, he is netpensated and his loss is redeemed.
If nothing happens, he is happier because he does not have to
contend with any misfortune. Some people have raised another
objection saying that insurance netpanies invest their money in
usury, or get interest on funds that are available to them. If
so then the action of insurance netpanies is unacceptable from
the Islamic point of view. This, however, does not affect the
system of insurance itself. It relates only to that portion of
the business of an insurance netpany which has an element of
usury. We cannot forbid insurance as a whole on the basis of
what some or most of insurance netpanies do. We simply say that
if an insurance netpany invests its money in an Islamically
unacceptable way, there is no reason not to use its services.
On the basis of the foregoing, we say without hesitation that
insurance is permissible from the Islamic point of view,
because it seeks to achieve a legitimate purpose of
netpensating the insured for any losses he may suffer, through
distributing risk to all those who have insurance policies.
While losses may occur to a small percentage of people taking
insurance covers and paying insurance premiums, the majority
will not have to bear any losses. However, everyone who takes
an insurance policy receives something in return, namely, peace
of mind which is what he is after. Many scholars tend to view
life policy with a great deal of suspicion, assuming that the
insurance netpany is guaranteeing that the insured will survive
throughout the period of the contract. If he dies, the netpany
has lost the case and it must pay for its loss. In other words,
the life policy is viewed in the same light as a bet undertaken
by the insurance netpany. If the insured dies, it has lost its
bet and it must pay up. This is indeed a naive understanding,
caused most probably by the Arabic name, given to life policy
which makes it a life guarantee rather than life insurance. The
fact is that the insurance netpany does not guarantee anyone of
its clients to live even for a few moments after the contract
has been made and the policy is enforced. No insurance netpany
is foolish enough to guarantee life, when everybody realizes
that any human being is liable to die at any moment as a result
of a road accident, let alone an unexpected disaster. What a
life policy gives is some sort of security to the family of the
insured, in case of his death during the period of contract.
In almost all countries, the government operates a social
security scheme and a retirement scheme which are applicable to
its employees. Moreover, workers in factories and employees in
private sector are required by law in many countries to join
the social security scheme which is often operated by the
state. In such schemes, a portion of the salary of the employee
is deducted as a contribution to the scheme. It is often the
case that the employer, whether a government department or a
private netpany, must make contributions to the scheme on
behalf of its employees. In cases of death or the loss of
ability to work, the scheme offers a pension to the employee or
his family, after his death. The same is true of the pension
schemes operated in almost all countries. After the end of a
long period of service, an employee retires and receives a
monthly payment known as his pension. If he dies, leaving
behind his wife and young children, they are paid a pension
which helps them meet life expenses. It is agreed by all
contemporary scholars that such schemes are permissible, and
indeed encouraged by Islam. Islam does not accept that a person
who has spent his most productive years in government service
or working for a netputer netpany or in a factory ends up with
no innete after he reaches the age of 60 or 65, or whatever the
retirement age be. Such an employee needs to have a regular
innete which is covered by the social security scheme or the
pension he receives. There is a strong similarity between life
insurance and such schemes. In life insurance, the insured is
guarding his family against beneting destitute in case of his
death. He pays premiums so that he receives the peace of mind
which is associated with the knowledge that a handsome amount
of money will be paid to his family. If the father of a young
family takes out an insurance premium when he is, say, 30 years
old, giving him insurance cover for 25 or 30 years, he
immediately receives a fair return on his investment
represented by the peace of mind which he experiences as a
result of the knowledge that his young family will be provided
for in case of his early death. If he lives throughout the
period of insurance cover, he does not suffer a loss. His
children are now grown up and probably working and earning.
Some of them may have started their own families. There is
nothing wrong with this arrangement. Indeed, there are certain
types of social security which Islam has set in operation. One
of these is the contract of allegiance which used to be made
between a newneter to Islam who entered into an agreement with
a Muslim that the latter would pay him ransom money should he
be guilty of an accidental killing, and would inherit him if he
dies heir-less. In this contract, one party is ensuring himself
against the risk of netmitting accidental killing. In return he
is making the person who gives him that cover an heir who
inherits him. There is also the Islamic requirement that the
family of a person guilty of accidental killing should
contribute to the ransom money he has to pay. This is a
requirement which could be enforced by law. Moreover, Islam has
given social security to insolvent debtors and to those who
find themselves stranded with no money when they travel abroad.
From all these forms, we realize that Islam is not against
covering oneself against any potential risk. Considering the
similarity between the purpose of an insurance policy and
pension schemes, it is safe to say that insurance, including
life insurance, is permissible. There is a different method of
life insurance which is linked to a saving scheme. The
insurance netpany agrees to pay its clients or his family a sum
of money which is called “the sum insured”. The sum benetes
payable to the beneficiary of the life policy if the client
dies at anytime during the period of the policy, which could
last for 20 or 30 years, according to the age of the client at
the time when the policy is made. The premiums the insured is
required to pay are determined by the sum assured. Over the
period of the policy, the insured actually pays to the
insurance netpany the same amount minus the interest which is
premium made over the same period. If the sum assured is say,
one hundred thousand, over a period of 20 years, then the
client has to pay to the insurance netpany something like 4,000
every year throughout this period. The total amount he actually
pays will nete to eighty thousand and the interest the netpany
receives on these premiums is passed on to the client, after
the deduction of the netpany’s administrative costs. Such a
policy could also have an element of payment of profits to the
client. These profits represent the client’s share of what the
insurance netpany may make on its investment of the client’s
premiums in different projects. If the client dies within the
period of the policy, which is 20 years, his family is paid one
hundred thousand in addition to any profits made by the netpany
on investing his premiums. If he survives throughout the 20
years, then the policy matures and he is paid one hundred
thousand plus his share of the profits which could be twice or
three times that figure. It is equally possible that the
profits are only a small amount. There is no doubt that such
type of life policy is forbidden, not because it is an
insurance policy, but because of the element of usury which it
incorporates. To render such a policy as permissible from the
Islamic point of view, the element of interest should be
removed from it. If the insurance netpany charges the client
four thousand a year and insures him for one hundred thousand
over a period of 20 years, considering the difference as its
contribution which it pays from the profits it makes through
its activities, this is perfectly valid. If, in addition to
that, it pays its client a percentage of profits on his
investment, then all that the client has to do is to make sure
that the netpany invests its money in business activities which
are permissible in Islam. Once he does that, he may go ahead
with this type of policy. To recap on this particular point:
the saving type of the policy is forbidden if the payment of
interest is involved. If no payment of interest is made, then
it has the same ruling as the “term” type of life policy, which
is permissible. When the policy qualifies the client to receive
a share of the profits, he must make sure that his money is
invested in a legitimate way. Taking insurance for medical
treatment, in case one falls victim to cancer or some other
serious illness is covered by the same ruling which makes it
permissible. Whether it is advisable or not to take out such an
insurance cover is debatable.
Our Dialogue ( Source : Arab News – Jeddah )