Muslims should not use conventional insurance for their life protection plan. From Shariah perspective, here are the reasons why;
In managing the wealth, people have been using insurance to manage the risk. Life does not always go as smoothly as we want it to be. Unexpected circumstances can throw us off our game or prevent us from living life to the fullest. Insurance has become a necessity for businesses and individuals to minimize risks and losses and reduce the impact of catastrophes on their lives and wealth.
Islam prohibits the attempt to avoid risk altogether. But Islam does not prohibit reducing risk. You may want to know this story from a book of hadith called At-Tirmidhi:
When Prophet Muhammad (PBUH) saw a bedouin (a desert dweller) leave his camel untied, he addressed the bedouin, “Why don’t you tie down your camel?” “I put my trust in Allah,” the bedouin said. “Tie your camel first, then put your trust in Allah,” the Prophet advised.
This story clearly shows the importance of everyone taking precautions to reduce personal risk. The efforts to avoid risk are not against Shariah’s principles. Then why should Muslims not use conventional insurance?
Why is Conventional Insurance Prohibited?
The vast majority of Shariah scholars have agreed that conventional insurance is not Shariah-compliant. It involves the element of riba (interest), gharar (excessive uncertainty), maysir (speculation), and the invalid transfer of risk from the insured to the insurer. Overall, it is incompatible with the ethical methods of making money since it incorporates elements of temptation and cheating.
Riba
Conventional insurance involves riba activities both directly and indirectly. Excess on the exchange between the amount of premium and the sum covered is the direct involvement of Riba. In other words, the amount of premium paid by the customer is not equal to the sum covered that he received. The indirect riba happens on the investment of the customer’s fund in interest-based businesses.
Gharar
Gharar means excessive uncertainty. It can be found in conventional insurance when the policyholder (customer) enters into a business where his liability and the right are uncertain. The insured (customer) will lose his money if the event of insurance does not happen. The insurer (insurance company) also does not know how much he will owe to the insured.
Maysir
Maysir (speculation) happens in conventional insurance if the profit of one party depends on the loss of the other. The monetary gains of conventional insurance come from speculation on the insured event. If the accident or the insured event occurs, the insurance will cover the lost amount. But if the insured event does not happen, the insurance will keep the premium as profit. It is either profit or deficit if the claims are less or higher than the premium received.
Each party benefits at the expense of the other. The prospect of a “chance profit” or gain pushes people to take risks, which is what makes an insurance contract a bet or a gamble. Due to its nature of business, conventional insurance involves riba, gharar, and maysir activity. Therefore, Muslims should not use conventional insurance. Instead, Muslims can opt for the Shariah-compliant insurance called “Takaful.”
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