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Islamic and Conventional Insurance's Differences

Islamic and Conventional Insurance's Differences

Currently, insurance is an important thing for many people. The reason is, insurance can help people when in an emergency. To get various benefits and avoid risks, you must understand Islamic and conventional insurance to determine which type of insurance is best to use.

Definition of Islamic Insurance

You must already be familiar with conventional insurance. Therefore, here we will discuss the meaning of Islamic insurance. Islamic insurance applies Islamic principles in all its activities. The method of collecting and managing funds is carried out by means of tabarru' or contributions from customers.

What are the Differences between Conventional and Islamic Insurance?

Now let's talk about Islamic and conventional insurance. Some of these differences are related to the ownership of funds, contracts, supervision, transactions, and others. By understanding these differences, you can determine which insurance to choose.

Therefore, understand all the differences between the two types of insurance and use all of this as a reference for choosing the best insurance that suits your needs.

1. Basic Principles

The main difference between the two types of insurance is the principle applied to the two insurances. Islamic insurance uses the principle of risk coverage. So, the risk is transferred from the customer to the company through risk transfer. The insurance company must bear all the risks experienced by the customer in accordance with the contracts that have been agreed by the insurance company and the customer.

Meanwhile, insurance carried out according to Islamic principles uses the principle of mutual help (ta'awuni and takaful) among customers. The trick is to collect funds managed by sharia principles to minimize certain financial risks.

2. Insurance Agreement System

Another difference is related to the insurance agreement or insurance contract. The agreement on conventional system insurance is tabadulli. So, it is a buying and selling system with clear buyers, sellers, objects, prices, and agreements between the two parties.

Meanwhile, the agreement system in Islamic insurance is a tabarru contract which is carried out on the basis of kindness and mutual help. So, commercial purposes are not the main objective of the agreement on sharia insurance. Therefore, the agreement on Islamic insurance is also known as non-profit oriented.

3. Fund Ownership

The third difference is the ownership of funds. So, the insurance that we often know so far uses a fund ownership system based on premium payments from insurance customers. Protection against these risks is also based on the premium paid by the customer and also the agreement that has been made by both parties.

Meanwhile, the system of fund ownership in Islamic insurance is collective. So, the funds are shared property. Therefore, if a customer experiences financial risk, other customers will help the customer with the shared funds that have been collected.

4. Management and Supervision of Funds

The last difference is the management and supervision of funds. Management of funds in conventional insurance uses a system that has been approved in the insurance agreement. Meanwhile, supervision is carried out by an official financial supervisory institution. However, there is no special institution created by the insurer to oversee the financial management.

Meanwhile, Islamic insurance manages funds from customers without recognizing the ownership of these funds. So, the funds will be managed by the insurer with a transparent system and all profits are fully for the customer. 

By understanding Islamic and conventional insurance, which insurance will you choose? Determine that and analyze in depth to be able to determine the most appropriate type of insurance institution.

Faisal “Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid.” — Albert Einstein

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