How does Takaful work?
Takaful provides financial protection if something unfortunate happens to you, based on Shariah principles. In a Takaful, you enter into a contract (aqad) to become one of the participants of a common Takaful fund where a pool of contributions by participants is shared to provide financial aid to those in need.
A Takaful fund is a pool of money which your contributions go into that will be used to pay for your claims. The money in the Takaful fund is usually invested in Shariah-compliant investment funds.
Your Takaful contribution is what you pay monthly, quarterly or annually to your Takaful operator for your Takaful certificate. Your contributions will go towards the Takaful fund as part of your voluntary contribution (Tabarru’).
A claim is a formal request you make to your Takaful operator to cover expenses if you suffer any loss or damages covered by your certificate. In a Takaful plan, at the end of your coverage period, if you or the other participants in the fund did not make any claims, and the fund makes a surplus after your Takaful operator has taken an operator fee, you and those participants will get a payout from the fund.
The surplus is shared after calculating likely future claims and other funds which might be needed. This payout will be distributed to the eligible participants of the fund and the Takaful operator on a pre-agreed ratio following the terms of your Takaful certificate’s contract. The Takaful operator also gets part of the surplus based on participants’ agreement to reward the Takaful operator for its achievements or good performance in managing the Takaful fund which leads to surplus.
In a Takaful certificate, risk, which is the chance that something bad will happen to you, is shared between all the Takaful fund participants. So, when you make a claim, payment for your coverage is shared between you and the other participants of the Takaful fund. The benefit of this is that if you do not make a claim, you may be given any money that is left over from the fund after other claims and fees have been paid and if the fund makes a profit. The profit is from the investments made by the fund, as discussed in the Introduction of this How does Takaful work? section.
Sometimes, even if you don’t make any claims, there might not be any leftover money to be given back to you because the other participants may have made the claims.
With conventional insurance, the policy agreement is only between you and your insurance company only. Your risk will be transferred to the insurance company which will be responsible for providing you with the necessary coverage.
What are the differences between Takaful and conventional insurance?
Risk is shared between all participants within the fund, with the Takaful company playing an “operator/administrator” role and charging an operator fee.
|Risk is transferred from you to the insurance company.|
Funds are only invested in Shariah-compliant investments. Riba (interest) based investment instruments are not allowed (haram)..
Investments depend on the insurance company and can have elements of interest, uncertainty and risk.
Takaful operations are supervised by a Shariah Committee.
|No Shariah compliance monitoring is required.|
|If there is no claim, profits or surplus from the fund may be distributed back to you in the form of surplus sharing.||
If there is no claim, the surplus or profits of the insurance fund belong to insurers.*
*This applies for most conventional insurance policies. However, conventional life insurance has two types of policies – participating or non-participating policies. Non-participating insurance policies are life insurance policies that do not entitle you to profits that the insurance company makes. Participating policies will entitle you to dividends that the insurance will make from investments. Do note that these returns are not guaranteed.
Although Takaful and conventional insurance have their differences, it is important to note that both types of insurance give you protection and savings.