How Sharia Insurance Works: The Definition, Aspects, Principles, and Benefits

How does Sharia Insurance work? For many Muslims, Sharia insurance is a way to guarantee and protect their future without being afraid of doing forbidden things in their religion, Islam. Yes, interest in banking and finance is known as riba or usury in Islam. Usury is considered a sin as it tends to be disadvantageous to others, in this case, the customer who borrows money.

Undeniably, there are many cases when customers cannot pay off their debts because the interest is too high. It ends up worse such as bankruptcy. Even some poor people commit suicide because there is no way they cannot bring back the money they have borrowed.

This is how Islam fights against usury in finance and its products including insurance. As a solution, Islamic teachings offer a solution under the umbrella of Sharia finance. One of the products is the Sharia insurance. So, what is Sharia insurance and how does it work? Here are further explanations.

The Definition of Sharia Insurance

Sharia insurance, known also as ta'min, takaful, or tadhamun, is an effort to cooperate and protect each other in a group of people in terms of finance. This cooperation is run through an investment product in the form of an asset or tabarru'.

Before starting the cooperation, it is important to make an agreement or akad that is made based on Sharia principles. Those principles are a commitment that the cooperation will be done free from fraud (gharar), gambling (maysir), usury (riba), persecution (zhulm), and bribery (rishwah). In addition, the cooperation also doesn't transact illegitimate (haram) stuff.

In the insurance agreement, terms and conditions are determined by both parties, including the interest if there is any. The customer is involved in every decision made so that it will not be disadvantageous for him or her later. After all parties have agreed, the transaction of the insurance product can be conducted.

If in the process, one of the parties violates the agreement that has been made before, the first step is to do a discussion (mushawarah) to find solutions where none of the parties is disadvantaged. However, if the violation goes on without any remorse, it means the disadvantaged party can take legal action.

Aspects in Sharia Insurance

If you are interested in joining this type of insurance, it is important to learn about some aspects of Sharia Insurance. All the aspects are not erasable as if one of them is not included, it may violate the Islamic teachings. So, what are those aspects?

1. Agreement (Akad)

As has been mentioned above, before the insurance transaction is conducted, there must be an agreement (akad) that must be profitable for all parties. In Sharia Insurance, there are 2 types of agreement, they are commercial (tijarah/mudarabah) and grant (tabarru/hibah).

The commercial agreement is designed for business transactions in which profits, whether in the forms of material or immaterial, are things intended to achieve. Meanwhile, the grant agreement with virtue and humanism as the goals.

After determining the type of agreement, all the parties involved must discuss the rights and duties following it. There are some main points to mention including the purpose of insurance, payment deadline, the amount of money to pay monthly, the amount of money to claim, how to claim it, and more.

As the provided of Sharia insurance products, the bank or company commonly has provided some options and views about how the insurance works. Interestingly, the customers can add details as long as they are not disadvantageous for all.

2. The Position of Each Party Involved

This aspect is basically very similar to conventional insurance products. Yes, each party involved in the agreement has his or her own position. In the commercial agreement, the insurance provider works as the manager (mudharib) as well and the customer positions as the policy holder (shahibul mal).

On the other hand, in the insurance with the grant agreement, the customer can grant his or her money to help other customers when they have a problem. Sure, there are terms and conditions regulated for both parties. Then, the insurance company works only as the manager of the fund.

3. Contract Terms

Both types of agreements mentioned earlier have their terms and conditions. One of them is that you can change the commercial agreement to a grant agreement but you cannot for the opposite. Besides, there are also details of the contract generally about some points as they are mentioned in the agreement.

4. Insurance Premium

Insurance premium generally means the total of money paid by the insurance customers in a certain period of time. The amount of the money is based on what has been dealt with in the agreement, whether it is a commercial or grant agreement.

It is very important to remember that in the calculation of premium, there is no usury at all. For example, if you buy the Sharia life insurance product, the company calculates the premium based on the mortality table with high validity and accuracy. The same thing if you want to buy the Sharia health insurance product, the amount of premium is calculated based on the accurate morbidity table.

Furthermore, the insurance Premium of the commercial agreement is later shared with the members or customers. The premium of the grant agreement is invested, instead.

5. Claim

To get the advantage of insurance, you need to claim it just like the conventional one. The company accepts your claim based on the agreement that has been made in the beginning. In some cases, the amount of money you find can be different.

Yes, in the Sharia insurance policy, the amount of money is based on the total premium that you have paid. There can be additions or subtractions that are mentioned clearly in the agreement. Sure, as Sharia finance focuses on discussion, you can ask or complain when there are unclear details or missing things when claiming the money.

The most important point here is, that there is no usury or disagreed profit taken by the Sharia insurance company. In addition, for the commercial agreement insurance, the customer has a right to claim the advantage completely. On the other hand, the grant agreement lets the customer claim only the amount that has been dealt with before the agreement.

6. Management

It is important also to know how the Sharia insurance company manages the money of customers. Only certain companies or institutions have the right to manage the money. Of course, those companies and institutions have passed through a set of fit and proper tests before being chosen by the government to run the management of Sharia insurance.

After the agreement has been made, customers pay the premium regularly, commonly, they pay it monthly. Then, the money is kept and regulated so that when the customer claims it, the money is available for him or her.

So, from where the company gains profits and fund to pay its employees? It is from the agreement made in the beginning. The concept applied in Sharia finance is that the customers give salary to the company along with its employees for their services to manage their money. This concept is known also as profit sharing, not interest.

Principles in Sharia Insurance

To make the management in Sharia Insurance done well without straying from the Islamic law, there are some principles implemented. The board of directors along with the company's staff must hold those principles for the goodness of society. So, what are the principles?

Intending to help each other,
Transparency in the finance management,
Avoiding forfeited funds,
Agreement based on all parties is vital,
The allocation of funds and investments is based on the Islamic law.

All the principles above must be fulfilled. If it is not, consequently, the implementation of the Sharia insurance is not valid.

Requirements in Sharia Insurance

After understanding and committing to join Sharia Insurance, both the insurance company and the customer must fulfill the requirements given. The requirements are not one-sided by the parties involved but it is based on Islamic law with Al-Qur'an and Hadith as the basis. The requirements in Sharia Insurance are as follows.

1. People Involved in the Transaction (Aqid)

People involved in the transaction or aqid refer to the insurance company and the customer. In the Sharia finance law, aqid must be mentally healthy people and they understand how the transaction works. If they are not, they must learn about it first to avoid any mistakes and misunderstandings later.

Besides, people involved in the transaction must have rights to the object to transact. In this case, the object is the insurance product itself. So, the customers have their money to buy the insurance product. Then, the insurance company is responsible for managing the money to be claimed later by the customer.

2. The Transaction Object (Ma'qud 'alaih)

The next requirement is the transaction object. A transaction object must fulfill other requirements before it is transacted. First, the transaction object must be available and have been seen by both parties during the agreement. Second, the object is owned by one party (the insurance company) completely, not other people, before being transacted by another party (the customer).

Third, the object is transacted whether when the agreement is made or at other times. Fourth, the object can be described clearly.

Therefore, the insurance company must explain the details about the insurance product before the customer decides to buy it and use the service. Lastly, the transaction object must be cleaned and free from impurities (najis).

3. Solemnization

The next requirement in Sharia insurance is solemnization. Solemnization is a part of the agreement signing that both parties, the insurance company, and the customer, are willing and agreeing to do the transaction based on Islamic law.

Solemnization or ijab qobul consists of 2 statements from 2 parties. Literally, ijab is a statement from the party that sells the object and qobul is the statement from the buyer. Furthermore, solemnization in Sharia Insurance also generates requirements such as the statements must be uttered clearly and both parties find the agreement without any doubt.

Benefits of Sharia Insurance

Although the mechanism of Sharia Insurance looks longer and more complex than the conventional one, undeniably, this type of insurance gives more benefits. It is particularly seen from the customer. To make it clear, here are some benefits of Sharia insurance when you buy it in the right place.

1. Free from Usury

The main purpose of Sharia insurance has been clear since the beginning. It is to prevent the usury practice that tends to be disadvantageous for customers. There is even no interest at all although the customer may still need to pay additional money to guarantee the risk and to wage employees. As there is no usury, customers don't need to worry about any loss and burdening interest to pay along with the installments.

2. Giving a Better Protection

Sharia insurance is considered to give better protection than conventional insurance. It is because the main principle implemented here is about cooperation and helping each other. The Sharia insurance company is not only paying the money claimed by the customer but also mentally supporting them when the risk is experienced.

3. Customers are the priorities

The main principle lying down in the management of Sharia insurance is that the customers are priorities. The company manages the fund as carefully as possible to make sure there is nothing changed. Besides, the management is also transparent to avoid any problems and misunderstandings whether now or later.

4. Sustainable

Particularly the Sharia life insurance implements the sustainability principle. It is because this type of life insurance doesn't only focus on the short-term profit but also the long-term one. It also considers other aspects such as business and the environment around the customers so that the fund to claim later will be advantageous for them.

5. Potential for bigger profits

Sharia insurance has a potential for bigger profits compared with the conventional one. How can it be? In some countries, companies tend to invest more capital in Sharia insurance than in conventional insurance. It is because the demands are getting higher as customers find Sharia insurance is proven to be secure.