Thank you for sending in your question to our website.
Our heart goes out to all those who have suffered in the recent bate of calamities around the world.
We truly feel their pain and loss, and we ask Allah to reward, bless, and compensate them.
May Allah grant them patience in the face of these trials and tribulations. Amen.
What is Insurance?
Insurance is a means of acquiring financial security against damage & loss.
It involves periodical payment of monetary installments, by one party to another, which the former can avail lump-sum, in case of accidental death or loss related to a certain physical asset, such as a car, home, or even a life.
Insurance is a financial concept that originated after the passing of the first few generations of Islamic scholars.
This is the reason why there is no scholarly text or ruling about its validity in existence, quoted directly from them.
The ruling on insurance has, however, been clearly issued by the latter-day Islamic scholars.
Ideally, it sounds perfectly sensible and appropriate to thus insure oneself against sudden loss.
But, in practicality, insurance involves many financial aspects that Allah has prohibited.
The Ruling on Traditional Insurance
Islamic law has prohibited traditional insurance in totality, in all its forms.
This is because of the following basic reasons (without going into the intricate financial details):
It involves giving and taking of riba, or usury
This happens when a person has paid, for example, only $3000 in aggregated installments to an insurance company.
Then, if and when they experience a damage to their vehicle or home, they are then able to avail a much greater amount than this.
A Muslim is totally prohibited to receive a large amount of money in return for a smaller amount.
Insurance involves an aspect of gambling
If someone pays an insurance company an amount aggregating $5000 for an asset, but that asset does not ever suffer any damage or loss, then they have in effect lost all this money to the company.
Just like gambling, a person stands to lose all the money that they give to an insurance company.
There is no guarantee that they will ever get it back, or avail something else in return for it eventually, such as goods or services.
For the above two main reasons, scholars of Islam categorically prohibit all kinds of insurance.
It is only allowed in cases of dire necessity, e.g. when it is obligatory to get it under the laws of a certain country.
Even in such cases, a Muslim insurer is not allowed to take any more money than the amount that he or she has hitherto paid to the company.
The Acceptable Alternatives: Savings & Takaful
However, we must not forget that Islam encourages us to do all that is in our power to protect ourselves from calamities.
We should use our faculties and resources to protect ourselves from real dangers and harms, without going to paranoid extremes.
This is clear from the hadith below:
One day the Messenger of Allah (peace be upon him) noticed a bedouin leaving his camel without tying it and he asked the bedouin: “Why don’t you tie down your camel?” The bedouin answered, “I put my trust in Allah.” The Prophet said, “Tie your camel first, then put your trust in Allah”. [Jami` Al-Tirmidhi]
This hadith indicates that “trust in Allah” does not mean leaving our assets unprotected.
Rather, we have to use all our common sense and physical resources to protect them from harm & loss.
By the grace of Allah, Islamic scholars in the finance industry have been working hard to introduce Islamic alternatives to the products and services offered by the banking and insurance industries.
Islamic Insurance is known as Takaful
Basically, Takaful is a form of risk-sharing as opposed to risk-transfer, according to Faizal Ahmad Manjool, the CEO of Minarah MultiConsulting, Ltd.
Someone makes a donation to a pool which is managed by a takaful operator who is paid for his services. Then, the members of the pool share from the pool to those members in need.
Until and unless they are able to take part in a takaful system, Muslims should periodically save a part of their income for a rainy day.
Loss and Death Will Come, No Matter What
We should also remember that it is part of our core Islamic creed, to believe in the pre-ordainment of Allah.
Despite our “tying our camel”, if the loss of the camel is preordained in our decree, it will happen, no matter what.
Loss, death, grief, and hardship can happen to anyone at any time.
This is the hard fact about the life of this world. If we lose something, we should try to bear the loss with patience.
We should also continue working hard to compensate ourselves, having full hope and trust in Allah, that He will help us pass any ordeal, until night becomes day again.
May Allah compensate all those who are afflicted. Amen.
And Allah knows best. I hope that this answers your question.
Salam. Please stay in touch.