LIFE INSURANCE: THE ISLAMIC MODEL
MUSA A SHIHADEH
A life insurance policy is not taken out to insure one’s own life but is a financial transaction undertaking a responsibility for protecting widows, orphans and other dependents of the deceased (assured) from future unexpected financial risk.
The conventional system, however, offers a life insurance policy, which may not be free from Riba (interest) or some other elements that are not accepted by Islam. Based on the observation of life insurance under the conventional system, many Muslims, and even some Islamic scholars, diametrically oppose the idea of life insurance without offering an Islamic alternative model, which might meet contemporary Muslim societies’ expectations towards protecting those in need from future financial risk.
Similarly, Shaikh al-Azhar claimed in a Fatwa that life insurance was not lawful. His claim was based on the grounds that it involves, inter alia, the elements of Riba, Gharar, insuring one’s life etc. Thus, he advised Muslims not to make money through such an unlawful transaction.
In fact, the central idea of an Islamic model of a life insurance policy is that it is not a policy to insure one’s own life, but a financial transaction relying on the principles of mutual co-operation by undertaking a responsibility towards safeguarding widows, orphans and other dependants.
It does not involve the elements of Riba nor Gharar but is operated on the principles of Mudaraba, a technique that does not clash with the principles of Mirath, nor with the principles of Wasiya. This is because, in an Islamic system, the nominee or nominees are not absolute beneficiaries but mere trustees, who are under a duty to obtain the benefits from the policy and distribute them among the heirs of the deceased (assured) according to the principles of Mirath (inheritance) and Wasiya (bequest).
The Islamic Model
A model of a life insurance policy under the Islamic discipline is quite different from a conventional one. It is a financial transaction based on the principles of Mudaraba financing, on the principles of mutual co-operation, undertaking a responsibility for safeguarding widows, orphans and othe r dependants of the deceased (assured policy-holder) from a future material risk.
The nominee(s) in the life insurance policy, who is appointed by the assured, is not an absolute beneficiary(s) of the policy but a trustee who receives the benefits and distributes them among the heirs of the deceased (assured) according to the principles of Mirath and Wasiya.
If the assured is still alive upon the maturity of the policy period, he has a right to claim from the insurer the paid premiums, plus a share of the profits made over the paid premiums, plus bonus and dividends according to the company’s policy.
But if the assured dies at any time before the maturity of the policy, the claims of the nominee(s) include the paid premiums, the share of the profits made over the paid premiums, bonus and dividends according to the company’s policy, plus a donation from the company’s charitable fund according to the financial condition of the beneficiary(s) of the assured.
As for the claim of benefits against a life insurance policy, the death of the assured does not necessarily need to be either natural or accidental but can have any cause (even be an unlawful death like suicide or being killed during the commission of a crime, etc.), so long as the death of the assured is proved. This is because the death of all creatures is determined by Allah (swt) as in the Holy Qur’an:
“No soul can die except by the permission of Allah (SWT), the term being fixed (by Allah SWT) …” (3:145)
Moreover, for the commission of suicide or any other crimes, the doer him/herself is solely accountable to Allah (swt). As Allah (SWT) ruled in the Holy Qur’an:
“… they shall reap the fruit of what they did, and you of what you do…” (2:134)
Thus, it does not mean that a criminal simultaneously will be accountable for his/her own wrongful act, and will also be deprived of other rights. It is a fundamental right of everyone who lives in the society to enjoy lawful transactions in business.
Such personal rights should be exercised by everyone equally, regardless of whether one is innocent or criminal, so long as one enjoys the rights within the law. Hence, this life insurance policy is a transaction whereby the assured’s beneficiary(s) should not be deprived owing to the assured’s criminal act.
The agent in a life insurance policy is supposed not to be paid (salary) out of the assured’s premiums, because he/she works for the company and thus should be paid by the company.
For example, since a life insurance policy is based on the principle of Mudaraba, the involved parties i.e., insurer, assured and agents, share the profits of the business, which is partly run by the assured’s paid premiums. Therefore, the interest for the agents is the share of the profits of the business, which is partly run by the assured’s paid premiums, plus a dividend and bonus according to the company’s policy.
As regards the insurable interest in a life policy under the Islamic model, the policyholder himself has an insurable interest if he is still alive upon the expiry of the policy period. If the assured dies at any time within the policy period, the insurable interest is vested only in the heirs of the assured according to the principles of Mirath and Wasiya.
Life Insurance: A Comparison of the Conventional System and the Islamic Model
The purpose of scrutinising this point is to discover the basic contrast between the conventional system of life insurance and the Islamic model of it. This is because some scholars and many Muslims have the impression that a life insurance policy is totally prohibited in Islam.
This misapprehension has arisen from the model of the conventional life insurance policy. Even though both the conventional system and the Islamic one is based on the notion of life insurance, there are undoubtedly several aspects whereby the two systems are in conflict in both principle and practice.
I would, therefore, like to sum up the basic contrasts between them, which may enable us to grasp the nature of the Islamic model of a life insurance policy as an alternative to the one in practice under the conventional system. The basic contrasts are as follows:
(i) A life insurance policy under the conventional system revolves around the element of Riba, whereas an Islamic model of a life insurance policy is totally free of Riba, being operated on the principles of Mudaraba financing.
(ii) In the conventional system of life insurance, the nominee(s) is an absolute beneficiary(s). Suffian J in Re Man bin Millat, gave the verdict that the nominee(s), inter alia, in a life insurance policy takes absolutely and exclusively the benefits of the policy.
In contrast, the nominee(s) of a life policy under the Islamic model is not an absolute beneficiary(s), but a mere trustee who is in a position to receive the benefits of the policy on behalf of the assured’s heirs and distribute it among them according to the principles of Mirath and Wasiya.
In Karim Vs Hanifa, the High Court of Karachi ruled that the nominees(s) in a life insurance policy is more than an agent. The National Council of Muslim Religious Affairs in Malaysia also issued a Fatwa to the same effect in 1979, that the nominee(s) of the life insurance policy is a mere trustee, who is supposed to receive the benefit of the policy and distribute it among the heirs of the assured according to the principles of Mirath and Wasiya.
(iii) The idea of a conventional life insurance policy is that if the assured dies at any time before the maturity of the policy, the nominee(s) is entitled to recover from the insurer the whole amount agreed in the policy, while if the assured is still alive upon the expiry of the policy period, he is also entitled to the whole amount agreed in the policy, plus the interest, dividends and bonus, subject to the company’s policy.
On the contrary, in the paradigm of an Islamic model of a life insurance policy, if the assured dies at any time before the policy matures, the beneficiary(s) is entitled to claim from the insurance company the whole amount of paid premiums, the bonus and dividends according to the company’s policy and a share of profits mad e over the paid premiums, plus a donation from the company’s charitable fund according to the financial status of the beneficiary(s) (i.e., if the beneficiary(s) is financially in good condition the amount will be lesser, but if the beneficiary(s) is financially weak and unstable the amount could be bigger).
Such a transaction is considered mutual co-operation for the welfare of the helpless people in society, and it is thus in line with the Quranic principle. Allah (SWT) says:
“…co-operate among yourselves in righteousness and piety… “(5:2)
However, in the case of the assured being alive upon the expiry of the maturity period, the assured is entitled to claim from the company the whole amount of paid premiums, a share of the profits made over the paid premiums according to the principle of Mudaraba and dividends according to the company’s policy.
(iv) In the operation of a life insurance policy under the conventional system, the payments for the agents are to be paid out of the assured’s paid premiums. Whereas under the Islamic mode l of a life insurance policy, the agents work for the company and thus should be paid by the company itself. This means that the payment for the agent could include a share of the profits made over the paid premiums, plus dividends and bonuses according to the company’s policy.
(v) As regards the insurable interest, under the conventional system, it is to be paid to the policy-holder himself should he be alive upon the expiry of the policy period. But in the case of the death of the assured within the period, the insurable interest is to be paid to husband or wife, parents or children, benefactor or beneficiary or servant, company or director, trustee or employee, partners, mortgagor or mortgagee.
In contrast, under the Islamic model, the insurance is to be paid to the assured or to his heirs, according to the principles of Mirath and Wasiya.
The Fatwa by Shaikh Al-Azhar:
Sheikh al-Azhar, Al-Shaikh Jad al-Haq Ali Jad al-Haq, issued a Fatwa session on the position of life insurance in the Islamic Sharia, which appeared in Al-Iqtisadul Islami, July 1995. In his Fatwa, he established that a life insurance policy is prohibited in the Islamic Sharia. His claim was based on the following grounds:
(i) In the light of the principles of the Islamic Sharia, no one may insure others’ wealth or property unless there is a fear of unjust enrichment, loss or destruction. In a life insurance policy, these three circumstances are not available. Moreover, a life insurance policy involves the element of Riba and therefore is not allowed in Islam.
(ii) A life insurance policy is a policy, which ensures one’s life, and thus it is not permissible in Islam.
(iii)A life insurance policy involves the element of Gharar (uncertainty). A transaction which involves Gharar is not valid in the Islamic Sharia and therefore life insurance is unlawful.
(iv) Moreover, he went on to say, a life insurance contract involves not mutual co-operation, but unlawful elements, and if a contract involves such elements, it is null and void, according to the Hadith:
“Muslims are bound by contractual conditions, except where they prohibit the permitted or permit the prohibited”
Finally, he advised Muslims not to take out a life insurance policy, because obtaining money from such a policy is Haram.
Comment on the Fatwa
In this section I would like to offer a humble response to the reasons that the honourable Shaikh has put forward as a basis in opposing the validity of life insurance policies.
(i) In the Sharia discipline no one has a right to insure another’s property unless there is a fear of unjust enrichment, loss or destruction. In a life insurance policy, the insurer insures a benefit over the paid premiums (paid by the assured) for the welfare of the beneficiary(s) of the assured for an unexpected event of assured’s death (loss of life) and also for the fear of the loss of the beneficiary’s material stability upon the death of the assured.
In all situations, the life insurance policy contains an element of loss. Abu Jai has pointed out that an insurance policy is a compensation for any loss incurred by the assured, not a profit nor a gain in betting. Hence a life insurance policy is not contrary to the Sharia discipline.
(ii) A life insurance policy does not involve elements of Riba but is a financial transaction based on the principles of Mudaraba financing, relying on the principle of mutual co-operation, which is justified by Quranic sanction. Allah (SWT) says:
“…co-operate ye with one another in righteousness and piety.” (5:2)
(iii)A life insurance policy does not insure one’s life but is a mutual financial transaction for the welfare of orphans, widows and other dependants. Such an initiative is, in fact, entirely justified by the following sayings of the Holy Prophet (SAW):
Narrated by Sahal bin Sa’ad, the Holy Prophet (SAW) said, “I and the person who looks after an orphan and provides for him will be in paradise”, Sahih al-Bukhari., op. cit., No 34.
Narrated by Huraira, the Holy Prophet (SAW) said, “whosoever takes an initiative (towards the welfare of) one’s financial difficulties, Allah (swt) will lighten his difficulties in this world and in the hereafter.” Sahih Muslim at supra-60.
Narrated by Safwan bin Salim, the Holy Prophet (SAW) said: “The one who looks after and works for a widow or for a poor person is like a warrior fighting for the cause of Allah (SWT) or like a person who fasts during the day and prays throughout the night.” Sahih al-Bukhari No 35.
Narrated by Saad bin Salim Abi Waqqas, the Holy Prophet (SAW) said “It is better for you to leave your off-spring wealthy than to leave them poor, asking others for help.” Ibid No 725.
(iv) A life insurance policy does not contain any element of Gharar (uncertainty). The assured believes that the subject matter of life insurance is his death, which is certain, and not Gharar (Qur’an 3:145). Moreover, the benefits over the policy in consideration of the paid premiums are also available, which is certain according to the principles of Mudaraba, and thus there is no element of uncertainty in it. Hence the misconception that a life insurance policy involves an element of Gharar is easily refutable.
(v) A life insurance contract involves elements such as Gharar (i.e., gambling), Riba, etc., which make it unlawful, according to Shaikh al -Azhar. But it is, in fact, a mutual financial contract that is free from the above unlawful elements (as proved in the earlier discussion). Therefore, it is binding, as justified by the saying of the Holy Prophet (SAW):
“Muslims are bound by contract, except one which prohibits the permitted or permits the prohibited.” Sunnah Al-Tirmidhi.
Based on the above comments, I would like to submit that the Shaikh al-Azhar’s advice to Muslims not to take out a life insurance policy because it is unlawful, is debatable, and therefore, I sincerely hope that the Muslim people may not be confused but will understand the clear concept of the validity of life insurance, which may enable them to apply it accordingly and gain rightful benefit from it.
Further Remarks
From the text of the Fatwa, it has been observed that, in opposing the validity of the life insurance policy, the Shaikh al-Azhar gave a few reasons which are surely not applicable to an Islamic model (Mudaraba-based) life policy. But there are some objections to the conventional one. Hence:
(i) Riba is not present in an Islamic model but is in a conventional one;
(ii) Gharar does not exist in a life policy because the subject matter and object of the policy are certain. The subject matter of a life policy is the death of the assured which is certain, while the object of a policy is to co-operate with each other, which is not vague at all;
(iii) A life policy does not mean to insure one’s life;
(iv) It is not an unlawful transaction.
Thus, it is not valid for the Shaikh al-Azhar simply to consider a life policy unlawful judging by the conventional practice, while failing to consider an alternative model of a life policy based on the Sharia.
Suggestions
A life policy contributes to the individual as well as the family, which is saved from being victimised by an unexpected material risk resulting from the assured’s death. Hence to enable the Muslim society to be benefited by an Islamic model of a life policy, the following suggestions are proposed:
(i) It is humbly suggested that Muslim scholars who oppose the validity of insurance, may make it clear that they are opposing the one practised under the conventional principle only. But simultaneously, they should also present an alternative model of Islamic life insurance, which would meet the contemporary Muslim society’s need to have a life policy;
(ii) To present an Islamic model of a life insurance policy, it is necessary to deepen our research skills and search for the relevant provisions on mutual co-operation, Mudaraba and social security from the Qur’an, the Sunnah and other sources of Islamic law, especially the doctrine of Masalih al-Mursala, which may justify life insurance specially for the economic benefit of the contemporary Muslim society. Mufti Mohammed Shafi, suggests that “it is also the responsibility of the religious scholars to study these problems and come up with practical solutions”.
Aspirations
Indeed, the life insurance policy under the conventional system could not be lawful in the sight of the Sharia, owing to its involvement of certain unlawful elements like Riba, compulsory nomination clauses, etc. But it is unfair of some Islamic scholars to oppose it generally, without mentioning an alternative model under the Sharia discipline.
A life insurance policy is necessary for safeguarding one against financial risk. Thus, an Islamic model of life insurance is suggested which is based on the principles of Mudaraba financing, which is different from the conventional one, for the benefit of the Muslim society.
It is sincerely hoped that Muslim scholars will not neglect the life policy, but open their minds and use their research skills to come up with a more constructive and comprehensive model of a life policy based on Sharia principles, so that the contemporary Muslims may benefit from it.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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