One of the main components of effective financial planning is to cover yourself with insurance. Takaful vs conventional insurance has been one of the main dilemmas for Muslims. We will discuss the critical differences between takaful and traditional insurance in the following. But let’s have a glance at the definition of takaful first.
What is Takaful?
Takaful is a joint guarantee. The principles of takaful follow Islamic perspectives or Shariah rules. Under the concept of takaful, participants agree to support each other in times of loss, damage mutually. Each member in the group fulfills their obligation by contributing a specific amount of money (tabarru) to a fund. The takaful operator, who is a third party, manages the fund.
Takaful vs Conventional Insurance
Even if both takaful and conventional insurance do the same job, providing coverage, there are several significant differences between them. We are going to see them one by one below:
1. Objective
A person joins the takaful agreement to contribute to the fund that can be helpful to the person or the group of people who encountered unexpected misfortune. On the contrary, a traditional insurance policy is purchased as personal financial security for an individual, and the insurance provider bears the risk.
2. Investment
The traditional insurance investment units will invest based on their assessment of what fits their profiles. Takaful investments, on the other hand, will adhere to strict guidelines. Takaful cannot invest in anything that involves gambling and uncertainty. Moreover, takaful can not make an investment into the practice of lending money at excessively high-interest rates.
3. Profits
There can be extra money due to low claims by takaful group members. Under the takaful policy, the funds will be distributed among the participants. Meanwhile, both participants and shareholders get a distribution from the profits from investments.
On the contrary, under conventional insurance, only shareholders get the profit. And it is totally against the “profit and loss sharing” concept in Islamic Finance.
Takaful vs Conventional Insurance: Which One is Cheaper?
One isn’t always less expensive than the other, but in terms of ‘additional risk premiums,’ takaful insurance may be less expensive. This is because takaful fund charges usually are fixed, and persons thought to be at higher risk are not typically charged more, unless, in extreme circumstances, that might result in fund losses.
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