Everything You Need to Know About Sharia Insurance

Everything You Need to Know About Sharia Insurance

In an increasingly interconnected world, the intersection of faith and finance has become a focal point of discussion and innovation. One such financial domain that has gained prominence is Sharia insurance, often referred to as Takaful.

This form of insurance adheres to the principles of Islamic law, ensuring that financial protection aligns with Islamic values. In this article, we will explore the concept of Islamic insurance, its fundamental principles, and how it operates, shedding light on the growing relevance and popularity of this unique financial system.


Sharia insurance, also known as Takaful, is a type of insurance that complies with Islamic principles. It operates on the basis of mutual cooperation and risk-sharing among participants. In Sharia insurance, policyholders contribute money into a common fund, and in the event of a loss or damage, they are compensated from that fund.

This system adheres to Islamic prohibitions on interest (riba) and uncertainty (gharar). Additionally, investments made by the fund are screened to ensure they are in compliance with Islamic ethics. Sharia insurance aims to provide financial protection while adhering to Islamic law.

Legal Basis

The legal basis for Sharia insurance, also known as Takaful, is primarily rooted in Islamic jurisprudence, particularly Sharia law. Sharia insurance is guided by the following principles:

  • Quranic Principles: The Quran, the holy book of Islam, encourages cooperation and mutual assistance among individuals, which forms the foundation for Takaful.
  • Hadith (Prophetic Traditions): The sayings and actions of the Prophet Muhammad emphasize ethical and fair financial practices, which are central to Sharia-compliant insurance.
  • Ijma (Consensus): There is a consensus among Islamic scholars on the permissibility of cooperative insurance (Takaful) that adheres to Sharia principles.
  • Qiyas (Analogical Reasoning): Islamic jurists use analogical reasoning to adapt these principles to modern financial and insurance practices, ensuring they align with Islamic ethics.
  • Sharia Board Approval: Sharia insurance companies have their operations reviewed and approved by Sharia boards, composed of Islamic scholars who ensure compliance with Islamic law.


Sharia Insurance Agreements come in different flavors that cover various protection and investment aspects following Islamic principles. Here are some common types:
  • Mudharabah: It's like a deal between two parties, the policyholder (you) and the Sharia insurance company. You give them money (premium), and they invest it. If they make profits, you share in it.
  • Wakalah: In this agreement, you let the insurance company handle your premium money and risk management. They charge a fee (ujrah) for doing this.
  • Kafalah: Think of this as a kind of guarantee. The Sharia insurance company promises to help you out if something bad happens, like a loss or damage.
  • Tabarru: This is like a charitable part of Sharia insurance. You agree to donate some of your premium money to help those in need.
  • Re-Takaful: It's a bit like insurance for insurance. The Sharia insurance company protects itself from big risks by passing some of the risk to another reinsurance company.


These days, there's a wide variety of sharia insurance products available. Here's a list of the common sharia insurance products you can find:

1. Sharia Life Insurance

Sharia insurance companies provide a sum of money to the beneficiaries when the insured person passes away. This is meant to support their loved ones in times of need.

2. Sharia Education Insurance

This insurance is all about securing funds for education. The agreed-upon education funds are given to the recipient (usually a child) as they progress through their educational journey. Even in the unfortunate event of the insured person's passing, the heirs still receive the educational benefits.

3. Sharia Health Insurance

This type of insurance is like a safety net for your health. If the insured person gets sick or has an accident, the insurance company provides financial help or reimbursement to cover medical expenses. It's a way to ease the burden of healthcare costs.

4. Sharia Investment Insurance

This is like a two-in-one product. It combines insurance and investment benefits. When you pay your premium, part of the money goes into a special fund (tabarru') for mutual help, and the rest is invested for you. It's a way to protect yourself and grow your money at the same time.

5. Sharia Loss Insurance

This insurance is your safety net for protecting your belongings. If something happens that leads to a loss of your possessions, this insurance company steps in to compensate you for your losses.

6. Group Sharia Insurance

Group insurance is designed for communities, like companies, organizations, or communities of people. It's usually cheaper because it covers a larger number of people compared to individual sharia insurance. So, it's an affordable way to ensure everyone in the group is protected.

Advantages of Sharia Life Insurance Over Conventional Insurance

Sharia insurance comes with several advantages when compared to conventional insurance. Here are five key benefits of Sharia life insurance that you should know:

1. No Involvement of Riba (Interest)

Unlike conventional insurance, which is often associated with interest (riba), Sharia life insurance doesn't involve any riba or interest-based practices. In Sharia life insurance, the contributions made by participants are simply premiums to cover the insured risk.

If no claim occurs, these contributions are not refunded to the participants. Due to the absence of riba, Sharia life insurance aligns with Islamic principles.

2. Enhanced Protection

Sharia life insurance is considered to provide better protection compared to conventional insurance. This is because Sharia life insurance is built on the principles of tabarru', mutual assistance, and cooperation. Sharia life insurance companies not only pay out claims but also offer advice and support to participants when risks arise.

3. Participant-Centric Approach

Compared to conventional insurance, Sharia life insurance is believed to prioritize the interests of the participants. In Sharia life insurance, insurance companies are required to manage participants' funds with care and transparency.

They must also provide clear and easily understandable information about the insurance products offered to participants and potential participants.

4. Sustainability Principle

Sharia life insurance adheres to sustainability principles. These companies don't focus solely on short-term profits; they also consider the long-term sustainability of their business and the environment. Consequently, Sharia life insurance companies tend to invest in sustainable and environmentally friendly Sharia-compliant instruments.

5. Greater Profit Potential

Sharia life insurance has the potential for higher profits compared to conventional insurance. This is because Sharia life insurance companies invest in Sharia-compliant instruments with greater profit potential than conventional instruments. The profits from these investments are shared between participants and the insurance company.

Differences Between Sharia Insurance and Conventional Insurance

Here are some practical differences between Sharia and conventional insurance that you should know:

1. Contracts/Agreements

In Sharia insurance, the contract is based on the concept of "hibah" (a form of charitable giving) and mutual help among participants, in line with Islamic law. Meanwhile, in conventional insurance, the contract is an agreement by the insurance company to provide coverage to the policyholder.

2. Ownership of Funds

Sharia insurance applies to collective ownership of funds (a pooled fund of participants). If one participant faces a loss, others contribute (provide benefits) through this pooled fund (tabarru'), adhering to the principle of sharing of risk.

This doesn't apply to conventional insurance, where the insurance company manages and determines the protection fund from monthly premium payments.

3. Surplus Underwriting

Surplus underwriting is the positive difference in managing underwriting risk from the tabarru' fund, after accounting for payouts, reinsurance, and technical reserves, calculated within a specific period.

In Sharia protection, surplus underwriting is distributed to participants according to regulations and agreed-upon product features. For conventional products, there's no concept of surplus underwriting, and any underwriting profit goes to the insurance company without distribution to policyholders.

4. Sharia Supervisory Board

Unlike conventional insurance, Sharia insurance companies are required to have a Sharia Supervisory Board to ensure compliance with Islamic principles in their operations, including protection products.

5. Compliance with Sharia Finance Principles

Transactions in Sharia insurance must adhere to Islamic finance principles to avoid some elements such as gambling, ambiguity, interest, and bribery.

6. Halal Investments

Sharia insurance follows Islamic law when investing the tabarru' fund, ensuring that only halal (permissible) financial instruments are involved.

Tips For Choosing The Best Sharia Insurance

Choosing sharia insurance isn't something you should do without thinking. After all, insurance products are there to protect you and your family from various risks. To make sure you're on the right track, here are some tips for picking good-quality sharia insurance:

1. Understand Your Needs

First things first, you need to figure out what type of insurance suits you and your family. There are various options, like life insurance, health insurance, and education insurance.

Some even come with investment benefits, like unit link policies. So, get to know your needs. If you're in need of sharia-based health insurance, go for a sharia health insurance product. Don't opt for something else.

2. Seek References and Choose the Right Product

These days, there are plenty of sharia insurance products from various companies. Each of them has its pros and cons. You can ask neighbors or relatives who use sharia insurance, do some online research about these products, and even compare them on financial product platforms.

Once you find the one that fits your needs, you can apply for sharia insurance online. It's easier and more convenient - no need to visit a branch office.

3. Ensure Official Registration and Oversight

Pick a reputable sharia insurance company, one that's officially registered and supervised by the relevant authorities. You can also check a company's credibility and track record online.

4. Be Mindful When Reading the Insurance Agreement

The agreement in sharia insurance is super important. It's like a promise or a kind of deal. Make sure you read and understand what's in it before you put your signature on it. Go through it carefully, so you won't feel like you've been misled down the road.

5. Grasp the Illustration Given

Before you officially agree to the deal, the insurance agent will show you an illustration of the sharia insurance product. This illustration might give you an idea of how much money you'll get when the agreement period ends.

Feel free to ask questions if something seems unclear. Don't fall for unrealistically huge benefits that sound too good to be true.

6. Match Your Needs with the Benefits

Every insurance product comes with its own set of benefits and advantages. Choose a product that can offer benefits that suit your needs. So, it's a good idea to understand what it offers before you dive into sharia insurance. For instance, if you're getting sharia health insurance, it's going to cover healthcare-related expenses, not education or accidents.

7. Keep an Eye on the Premium

The amount you pay for insurance, the premium, should fit your budget. Go for a sharia insurance product that offers affordable premiums while giving you the benefits you need. If you find a few sharia insurance products with similar premiums, it's wise to compare the benefits they offer first.

8. Buy from a Licensed Agent

There are plenty of insurance agents out there trying to win you over. They'll use all sorts of tactics to get you to sign up for insurance with them. But make sure you buy from a legitimate insurance agent who's a member of an association that oversees insurance.

These are the professional agents who have passed tests and are certified by the association. So, if you ever run into issues with your policy, you can ask the agent for help until everything's sorted out.

9. Understand How They Handle the Money

Sharia insurance manages its funds based on the Quran and Hadith teachings, using the Al-Mudharabah system according to Islamic principles.

This fund management system is considered permissible and acceptable for everyone, whether they're Muslim or not. So, knowing how they handle the money in sharia insurance can bring peace of mind to customers.

Be Wise in Choosing Insurance!

From the tips mentioned above on how to pick high-quality Sharia insurance, we hope it helps customers understand what insurance companies offer. Especially the sharia insurance that aligns with Islamic teachings, so it can bring peace of mind to Muslim customers who choose it.
Faisal "The successful warrior is the average man, with laserlike focus." - Bruce Lee

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