Difference between Conventional and Takaful Insurance Systems

Conventional insurance is well established and caters to individuals and businesses choosing to insure against risk or being proscribed to do so. Those who follow Islamic law are strictly forbidden from opting for conventional insurance as it does not comply with Shariah. Takaful is an old concept which is now gaining popular ground as a legitimate option which is based on risk sharing rather than risk transfer. Takaful insurance is in fact an option for anyone and is not limited to those who abide by Islamic law.

There are several key differences between Takaful and conventional insurance systems:

1) Takaful does not include the three elements of interest, uncertainty and gambling which are each integral parts of conventional insurance, but forbidden under Shariah. All funds invested under Takaful must be free of interest whilst conventional insurance can invest in interest based investments.

2) Conventional insurance operates as a commercial business with individuals purchasing policies to insure against risk. Premiums paid will vary between individuals dependent on the company’s assessment of their risk. If no claims are made the premiums paid will be retained by the company as profit, or a bonus might be paid.

In comparison contributions made to Takaful insurance are divided between two funds: one to be considered as a charitable fund and the other intended for profit and loss sharing. The custodian of the Takaful funds splits any profits between the contributors and the custodian, with the percentage of the division determined in advance.

3) Takaful means to share amongst each other. Those who contribute to the fund are known as participants and they are guaranteeing each other. If there are needs to be met through the fund, those who receive from it are considered beneficiaries rather than claimants. Individual rights to the funds are waived in favor of the collective need. The Takaful system is thus based on mutual co-operation rather than individual premiums and claims.

4) Takaful insurance has a fixed minimum contribution which disregards the idea that someone may be more of a risk to insure. Contributions are not affected by credit scores which most conventional insurance companies take into consideration.

5) Conventional insurance applies limitations to policies which will exclude certain claims. A primary example is that life insurance will not be paid in cases of suicide. Takaful on the other hand does not exclude suicides, thus guaranteeing the good of the family regardless of the circumstances of death.

Takaful is predicted to be a growth area in insurance, appealing not only to Muslims but to others who are attracted to the mutual element. Others who are concerned about the type of businesses which their funds are invested in may also consider Takaful insurance to be a more ethical choice.

Sources: Islamic World net. & perfspot.com.