Life Insurance: is it haram or halal?

Life insurance is a topic that is often discussed within the Islamic community, with many individuals wondering whether it is halal or haram. In this article, we will explore the two types of life insurance and their compatibility with Islamic principles.

Types of life insurance

There are two main types of life insurance: term insurance and whole life insurance.

Term insurance

Term insurance is a protective insurance policy that pays out to your dependents in the event of your death within a certain period. For example, if you purchase a policy costing £10 a month which promises to pay out your dependents £100,000 in case you die before the age of 50, then either you die before the age of 50 and your family gets £100,000, or you survive past 50 and the policy simply ends. The insurance company keeps the £3,000 you’ve paid in until then.

Whole life insurance

Whole life insurance is a mixture of protective insurance and an investment vehicle. For instance, you take out a policy at the age of 25 for £100 a month and it is set to pay out a minimum of £35,000 at the age of 50. If you die before the age of 50, it pays out £35,000 to your dependents. However, if the underlying investments do well, you get paid out £50,000+ by the time you’re 50.

The Islamic perspective: term life insurance

Term life insurance is equivalent to all other types of protective insurance that were discussed in the previous article on whether insurance is halal or haram. The same arguments apply, namely that the gharar (uncertainty) involved in modern insurance is not the same as the gharar forbidden in the ahadith, the benefits of insurance outweigh the negatives, and if takaful is Shariah-compliant, then conventional insurance must also be Shariah-compliant.

The Islamic perspective: whole life insurance

Whole life insurance is considered permissible only if the underlying investments are permissible. This is because it is an investment vehicle and involves the use of interest, which is haram in Islam. If the investments are halal, then the policy is also halal. For instance, if the investments are made in halal sectors like education, healthcare, and green energy, then the policy is considered halal.

Arguments against life insurance

One argument against life insurance is that it seeks to insure against the loss of life and the sustenance of one’s family after one’s death. This is seen as encroaching on the domain of Allah, as Allah has specifically mentioned life and sustenance as two categories we shouldn’t worry about, as they are in the hands of Allah.

However, this argument is weak, as Allah doesn’t want us to take no precautions whatsoever. The nusus (scriptures) say, “Do not throw [yourselves] with your [own] hands into destruction.” Therefore, taking out life insurance to protect one’s family is not against Islamic principles, as long as it is term life insurance.

Another argument is that whole life insurance involves the use of interest, which is haram in Islam. However, if the underlying investments are halal, then the policy is also halal.

Conclusions

In conclusion, term life insurance is halal, and whole life insurance is halal only if the underlying investments are halal. As with all financial matters, it is essential to seek guidance from a qualified Islamic scholar or advisor before making any decisions.

FAQ

Is life insurance halal or haram?

Term life insurance is halal, and whole life insurance is halal only if the underlying investments are halal.

Is interest haram in Islam?

Yes, interest is haram in Islam, as it involves taking or paying a predetermined amount of money in addition to the original loan, which is considered riba (usury). Islam encourages trade and investment that benefits both parties, without exploiting or causing harm to either party.

Why do some people believe life insurance is haram?

Some people believe life insurance is haram because they perceive it as trying to insure against the loss of life and the sustenance of one’s family after one’s death, which is seen as encroaching on the domain of Allah. Additionally, whole life insurance involves the use of interest, which is haram in Islam. However, these arguments are not strong enough to make all forms of life insurance haram.

Can Muslims use conventional life insurance companies?

Muslims can use conventional life insurance companies as long as the policies they purchase are Shariah-compliant. In the case of term life insurance, there are no major issues, but in the case of whole life insurance, it is important to ensure that the underlying investments are halal. Alternatively, Muslims can opt for takaful, which is a Shariah-compliant form of insurance.

Overall, life insurance is a topic that requires careful consideration within the Islamic community, with many different opinions and perspectives to take into account. While term life insurance is generally considered halal and whole life insurance can be halal if the underlying investments are halal, it is important to seek guidance from qualified Islamic scholars or advisors before making any decisions.

It is also worth noting that there are alternative forms of insurance that are specifically designed to be Shariah-compliant, such as takaful. This type of insurance operates on the principle of mutual cooperation and is structured in a way that is compliant with Islamic principles.

Ultimately, the decision to purchase life insurance or not is a personal one that depends on individual circumstances and beliefs. However, by understanding the different types of life insurance and their compatibility with Islamic principles, and engaging financial advisor who understands Islamic Finance, individuals can make informed choices that align with their values and beliefs.