Sharia Compliant Life Insurance

• The semi- consensus amongst Fiqh Councils and contemporary scholars is that commercial insurance is a transaction that involves ambiguity (undue risk taking) , misrepresentation, interest, and gambling. Therefore, transactions that involve these defects are forbidden. Accordingly, sales insurance- or purchased extended warranty- being a type of commercial related insurance is also not allowed.

• Nevertheless, there are two other types of general structures of insurance that are permissible, government sponsored, and cooperative or mutual insurance.

• Arguably, this distinguishing is based on the differentiation between unilateral and bilateral contracts. Many contemporary scholars see commercial insurance as a bilateral contract and transaction, and the other two categories as unilateral.

• Close analysis of this argument leads others to point out the invalidity of this understanding, and its lack of soundness. All insurance, except welfare insurance without premiums, are bilateral contracts and transactions. All policies will be cancelled by the underwriter if a premium is not paid by the insured, hence, the inherent bilateral structure of all insurance products is obvious.

• Recently, the International Islamic Fiqh Academy (IIFA) has acknowledged “Islamic insurance” including government-based and mutual insurance as “cooperative insurance” and not “unilateral agreement or non-profit ones” anymore. In its conference in Riyadh-Saudi Arabia from 18th to 22nd of November 2013, the IIFA declared: 

“التأمين التعاوني عقد جديد أساسه مبدأ التعاون المنضبط بضوابطه الشرعية المستمدة من القرأن والسنة النبوية”.

Which means “Cooperative insurance is a new contract that is based on and abide by the Sharia principles derived from the Quran and Sunnah”.

In this regard as well, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has declared the following:

” التأمين الإسلامي هو اتفاق أشخاص يتعرضون لأخطار معينة على تلافي الأضرار الناشئة عن هذه الأخطار، وذلك بدفع اشتراكات على أساس الالتزام بالتبرع“

Which means “Islamic insurance is an agreement between people who face certain dangers to avoid the harm resulted from these dangers, by paying subscriptions based on the concept of binding donation…”

It is worth mentioning here that (binding donation) is none but bilateral agreement! Underwriters will immediately cancel any insurance policy that does not generate profits or breakeven at least; another proof of the nature of the bilateral nature of insurance.

• The other argument of the scholars that see the differentiation between insurance types, is all insurance present ambiguity, gambling and Riba, therefore, it is only permissible in the case of government sponsored or none for profit cooperatives due to its benevolence goals (where all these deficiencies are overlooked according to the Islamic law); which is also a false argument.

Insurance is not meant for lazy profits by the insured, rather, it is meant to provide protection of lives and properties. The insured is seeking protection as a service and is not entering the transaction to make an easy return on money for money arbitrage transaction. There are Contemporary Financial Issues Dr. Main Alqudah 10 AMJA 16th Annual Imams’ Conference | Contemporary Financial Issues (Buying Real Estate and Retirement Accounts) | Mar 1st-3rd 2019 multiple contracts in history allowed by scholars to seek protection for a fee, and even compensation for a “measurable loss”.

• Close analysis of the government-based insurance in the US in particular, namely Medicaid and Medicare, show that the government does not provide underwriting services. The government subsidizes and outsources the operation of those two programs to private companies. Therefore, the arguments to draw a distinguishing are flowed.

• Based on the above; insurance in theory is a permissible bilateral transaction based on the Fiqh maxim: “In principle, everything is permissible” i.e. transactions are permissible unless it is clearly proven to be otherwise.

• However, few of the options insurance companies give to their clients in the form of guaranteed returns are not permissible. For example, offers of fixed returns on added premiums for the purpose of building a cash savings position, are considered Riba; despite the fact that the policy and its variable investment account maybe permissible. This includes any fixed returns benefits on accumulated premiums paid out on future events, in addition to death or disability benefits; like interests on cash positions.

• In 1992, the Islamic Fiqh Council of India (IFCI) has permitted for Muslims reside in India to have insurance on their properties and their lives as well. There was unrest and turmoil in the region at that time, where Muslims ’lives and properties were unjustly targeted, either by the government itself or by other deviant religious sects. The Fatwa was based on two Fiqh maxims; “Necessities permit prohibited matters” and “Harm is to be removed”.

• Based on the above, my position is that Muslims in the US should be permitted to have life insurance, either because of the default permissibility of life insurance- to my knowledge – or otherwise, because of the necessity involved. As explained before, necessity does not have to be an existing one, rather it is enough to be highly anticipated. A simple assessment of the situation of Muslim families who lost their sponsors show clearly how dire in the need for the vast majority of Muslims in the US to have life insurance.