Insurance: A review on legitimacy of general and life insurance

Q283 :Insurance: A review on legitimacy of general and life insurance

A283 : Quite some time back, I wrote an answer encouraging a reader to stop his life insurance policy. Two persons working in the field of insurance for a number of years have provided me with points about insurance policies and why they believe them to be Islamically acceptable. This has prompted me to study the question of insurance at a great depth and I discussed the subject with a number of scholars and referred to much that has been written on it. I have also received a number of letters on general insurance and I am discussing the subject at length hoping that this comprehensive answer will serve as an answer to every reader who has put to me a question on insurance. I am grateful for the information provided which was of benefit in arriving at the conclusion I am now explaining. An insurance policy is a contract which aims at providing compensation for potential loss or damages that are specified in the contract. The insured pays premiums either by installments or in a lump sum, in order to have insurance cover for a specified period of time. Should the loss or damage occur, the insured makes a claim against the other party which is normally the insurance company and he receives the compensation to which he is entitled under the terms of the policy. It is highly significant that an insurance company undertakes its business for profit. The risks against which insurance cover can be given are wide-ranging and vary in nature from theft to loss of goods during transportation to waste of food kept in a freezer due to a power cut or power failure. There is also the well-known life insurance which deserves to be mentioned separately. A form of insurance which has been made obligatory in most countries is that which concerns driving and motor vehicles where the law of most countries requires drivers to have at least a third party insurance policy before they drive. Since we have discussed car insurance recently [Read page 131], we will not refer to it here. The Fiqh Counsel of the Muslim World League ruled in favor of what it called the "cooperative insurance", which visualizes a group of people working in the same type of business establishing a joint fund, to which everyone of them contributes. The purpose of the fund is to compensate any one of them who suffers specific losses, due to unforeseen circumstances. There is no element of profit in this type of insurance. If the fund is established for a specific period of time, then when that time lapses, the money still available in the fund is given back to the members in the same percentage as of their contributions. When we look at what insurance companies do, we find that they work on the same principle, but the fund they establish out of the premiums they charge to their clients is much greater and the risks covered are more wide ranging. No money is returned to clients at the end of the term of agreement. The premium is simply paid in return for the insurance cover. The company makes profits in as much as the premiums it charges exceed the claims it has to pay out. There is no doubt that the objective of the insurance is sound, legitimate and wins the approval of Islam. It seeks to reduce or redress the effects of a natural or man-made disaster. Hence, it is in effect a regularization of the cooperation which is required to be shown by the Muslim community when unfortunate circumstances befall its members. For an insurance company to extend such a service and make it available to a large number of people requires a great deal of managerial and administrative work. It has to employ a sufficient work force to look after the various aspects of its work and it has to have offices, stationery, equipment, etc. To do all this, and to make profit as a result is perfectly legitimate. From the above we conclude that the concept of insurance is sound and its organization through an insurance company is acceptable. Hence, there is nothing wrong in principle in seeking insurance cover against potential risks that a person may run with regard to himself, his property or his business. Having said that, I must point out that many legitimate or permissible things can be used for unacceptable purposes. When this happens, we pronounce something as forbidden, not because it is sinful in nature, but because of its usage for the wrong purpose. It is important, therefore, to look at how insurance works in practice and to try to find out why many scholars remain opposed to it. One of the objections frequently raised, suggests that insurance is a form of gambling. It has been suggested that insurance companies determine premiums on the same principles and rules which are used by gambling companies in quoting prices. It may be so, but the use of mathematical rules and principles for a forbidden purpose does not make it forbidden to use them for a legitimate purpose. Moreover, gambling is totally different from insurance. Gambling is a moral evil which has very adverse effects on the gambler and his family. A gambler may lose all his fortune in one unlucky night in a casino. There is only one winner in gambling which is the owner of the casino or the betting shop. All their clients are losers. Moreover, a gambler always lives in fear of losing all his wealth. His family runs the risk of total loss. In insurance, the reverse is true. The insured has the peace of mind derived from the knowledge that should a catastrophe take place, he will be indemnified. Moreover, the benefits in insurance are mutual. All those who take insurance policies as well as the insurance company benefit by the insurance schemes. Another objection suggests that insurance is a form of betting. The insured person places his premium and hopes for the best. If nothing happens to him, or to his property, he simply loses his premium, in the same way as a betting person loses his bet. There is a big difference between the two. When a person places a bet he hopes to win because that win will give him a net income. A person taking insurance cover pays his money for security. He prefers that nothing happens to him or to his property which would require him to make a claim against the insurance company. He prefers safety for himself and for his property. If something happens and he has to make use of his insurance policy, he simply gets a reduction in the losses he has suffered. Take for example a person who has insured his house contents against theft, but burglars break in and get away with much of his valuables. He will probably receive the value of what he has lost, but he would have to lose time in buying replacements. Moreover, some of these valuables may have a sentimental value which he can never replace. Some people have suggested that an insurance policy represents a challenge to Allah's will. A good believer, it is argued, accepts whatever calamity befalls him as an act of Allah and submits to Allah's will in all circumstances. While this is certainly true of a good believer, an insurance policy does not attempt to prevent Allah's will. By taking an insurance policy, a person only seeks to reduce the effects of Allah's will, not to prevent it. Sheikh Mustapha Azzarqa, professor of Islamic law, likens insurance to the iron bars placed on top of a building to divert a thunderbolt away from it. When the architect places these iron bars, the thought of preventing the thunderbolt happening does not occur to him at all. He is only trying to save the building in which he has put so much effort from being destroyed by it. This he achieves through diverting its direction, taking it deep underground. A more serious objections is that which groups insurance with sales in which risk is a basic element. These are known in Islamic law as "gharar" sales. Examples of such deals is to sell the fruits of trees at the beginning of the season when their quality [or quantity] cannot be established yet. All such sales are forbidden in Islam, because they involve risk to the buyer and there may be an element of deception on the part of the seller. It is also forbidden to sell an unidentified object as in the case when someone sells a sheep from a flock without specifying or identifying it. When we consider this particular aspect, we find that Islam has outlawed deeds which involve an exceptional or a serious element of risk. If we were to say that any deal which has even the slightest element of risk is forbidden, then we will block most business deals. When the risk element is of normal or reasonable proportions, a deal may go through. In insurance, what a person buys when he seeks insurance cover is not the amount of compensation he will receive when something happens to him or to his property. What he buys is peace of mind. This is tangible return for the money he pays. Once cover is extended, the insured has this peace of mind which, to him, is a fair return on his investment. If something happens to him or to his property, he is compensated and his loss is redeemed. If nothing happens, he is happier because he does not have to contend with any misfortune. Some people have raised another objection saying that insurance companies invest their money in usury, or get interest on funds that are available to them. If so then the action of insurance companies is unacceptable from the Islamic point of view. This, however, does not affect the system of insurance itself. It relates only to that portion of the business of an insurance company which has an element of usury. We cannot forbid insurance as a whole on the basis of what some or most of insurance companies do. We simply say that if an insurance company invests its money in an Islamically unacceptable way, there is no reason not to use its services. On the basis of the foregoing, we say without hesitation that insurance is permissible from the Islamic point of view, because it seeks to achieve a legitimate purpose of compensating the insured for any losses he may suffer, through distributing risk to all those who have insurance policies. While losses may occur to a small percentage of people taking insurance covers and paying insurance premiums, the majority will not have to bear any losses. However, everyone who takes an insurance policy receives something in return, namely, peace of mind which is what he is after. Many scholars tend to view life policy with a great deal of suspicion, assuming that the insurance company is guaranteeing that the insured will survive throughout the period of the contract. If he dies, the company has lost the case and it must pay for its loss. In other words, the life policy is viewed in the same light as a bet undertaken by the insurance company. If the insured dies, it has lost its bet and it must pay up. This is indeed a naive understanding, caused most probably by the Arabic name, given to life policy which makes it a life guarantee rather than life insurance. The fact is that the insurance company does not guarantee anyone of its clients to live even for a few moments after the contract has been made and the policy is enforced. No insurance company is foolish enough to guarantee life, when everybody realizes that any human being is liable to die at any moment as a result of a road accident, let alone an unexpected disaster. What a life policy gives is some sort of security to the family of the insured, in case of his death during the period of contract. In almost all countries, the government operates a social security scheme and a retirement scheme which are applicable to its employees. Moreover, workers in factories and employees in private sector are required by law in many countries to join the social security scheme which is often operated by the state. In such schemes, a portion of the salary of the employee is deducted as a contribution to the scheme. It is often the case that the employer, whether a government department or a private company, must make contributions to the scheme on behalf of its employees. In cases of death or the loss of ability to work, the scheme offers a pension to the employee or his family, after his death. The same is true of the pension schemes operated in almost all countries. After the end of a long period of service, an employee retires and receives a monthly payment known as his pension. If he dies, leaving behind his wife and young children, they are paid a pension which helps them meet life expenses. It is agreed by all contemporary scholars that such schemes are permissible, and indeed encouraged by Islam. Islam does not accept that a person who has spent his most productive years in government service or working for a computer company or in a factory ends up with no income after he reaches the age of 60 or 65, or whatever the retirement age be. Such an employee needs to have a regular income which is covered by the social security scheme or the pension he receives. There is a strong similarity between life insurance and such schemes. In life insurance, the insured is guarding his family against becoming destitute in case of his death. He pays premiums so that he receives the peace of mind which is associated with the knowledge that a handsome amount of money will be paid to his family. If the father of a young family takes out an insurance premium when he is, say, 30 years old, giving him insurance cover for 25 or 30 years, he immediately receives a fair return on his investment represented by the peace of mind which he experiences as a result of the knowledge that his young family will be provided for in case of his early death. If he lives throughout the period of insurance cover, he does not suffer a loss. His children are now grown up and probably working and earning. Some of them may have started their own families. There is nothing wrong with this arrangement. Indeed, there are certain types of social security which Islam has set in operation. One of these is the contract of allegiance which used to be made between a newcomer to Islam who entered into an agreement with a Muslim that the latter would pay him ransom money should he be guilty of an accidental killing, and would inherit him if he dies heir-less. In this contract, one party is ensuring himself against the risk of committing accidental killing. In return he is making the person who gives him that cover an heir who inherits him. There is also the Islamic requirement that the family of a person guilty of accidental killing should contribute to the ransom money he has to pay. This is a requirement which could be enforced by law. Moreover, Islam has given social security to insolvent debtors and to those who find themselves stranded with no money when they travel abroad. From all these forms, we realize that Islam is not against covering oneself against any potential risk. Considering the similarity between the purpose of an insurance policy and pension schemes, it is safe to say that insurance, including life insurance, is permissible. There is a different method of life insurance which is linked to a saving scheme. The insurance company agrees to pay its clients or his family a sum of money which is called "the sum insured". The sum becomes payable to the beneficiary of the life policy if the client dies at anytime during the period of the policy, which could last for 20 or 30 years, according to the age of the client at the time when the policy is made. The premiums the insured is required to pay are determined by the sum assured. Over the period of the policy, the insured actually pays to the insurance company the same amount minus the interest which is premium made over the same period. If the sum assured is say, one hundred thousand, over a period of 20 years, then the client has to pay to the insurance company something like 4,000 every year throughout this period. The total amount he actually pays will come to eighty thousand and the interest the company receives on these premiums is passed on to the client, after the deduction of the company's administrative costs. Such a policy could also have an element of payment of profits to the client. These profits represent the client's share of what the insurance company may make on its investment of the client's premiums in different projects. If the client dies within the period of the policy, which is 20 years, his family is paid one hundred thousand in addition to any profits made by the company on investing his premiums. If he survives throughout the 20 years, then the policy matures and he is paid one hundred thousand plus his share of the profits which could be twice or three times that figure. It is equally possible that the profits are only a small amount. There is no doubt that such type of life policy is forbidden, not because it is an insurance policy, but because of the element of usury which it incorporates. To render such a policy as permissible from the Islamic point of view, the element of interest should be removed from it. If the insurance company charges the client four thousand a year and insures him for one hundred thousand over a period of 20 years, considering the difference as its contribution which it pays from the profits it makes through its activities, this is perfectly valid. If, in addition to that, it pays its client a percentage of profits on his investment, then all that the client has to do is to make sure that the company invests its money in business activities which are permissible in Islam. Once he does that, he may go ahead with this type of policy. To recap on this particular point: the saving type of the policy is forbidden if the payment of interest is involved. If no payment of interest is made, then it has the same ruling as the "term" type of life policy, which is permissible. When the policy qualifies the client to receive a share of the profits, he must make sure that his money is invested in a legitimate way. Taking insurance for medical treatment, in case one falls victim to cancer or some other serious illness is covered by the same ruling which makes it permissible. Whether it is advisable or not to take out such an insurance cover is debatable.

Our Dialogue ( Source : Arab News - Jeddah )