Background to study:
Insurance is a financial industry which has surfaced as a colossal industry for both in Muslim and Non Muslin world. In Conventional Insurance there are many elements, activities and procedures which are considered unethical, unlawful and unislamic by majority of Islamic scholars. Elements such as uncertainty, gambling and excessive interest are the main culprits. (Khair Bakhsh, 2009). For the satisfaction of Muslim concern, market experts and Islamic scholars introduced an insurance with the name of Takaful.The increase in demand of Takaful system and the presence of large markets for its products is compelling the entitled authorities to introduce it in Pakistan as soon as possible.
What are the prospects and perception of Islamic life insurance in Peshawar?
Purpose of the study:
- To review why convention system is prohibited in Islam
- To compare Islamic Life Insurance (Takaful) with Contemporary Life Insurance.
- To find out justification of an Islamic Life Insurance (Takaful)
- Analysis of prospects of Takaful in Peshawar City.
In this research I will be studying existing Islamic life insurance system and adding no new finds to body of knowledge.
Scheme of study
Type of investigation:
This is a descriptive study:
The format, which will be followed in this study, is to find out justification of an Islamic Life Insurance and what are its prospects in Peshawar.
In this research I will observe and study secondary data regarding Islamic Life Insurance and Conventional life Insurance system.
Unit of Study:
My research unit of analysis will be organization
Study will be done in natural settings in which variables will not be controlled.
In this study researcher’s interference will be minimal and has no direct interference with the Islamic life insurance organizations because I am not allowed to interfere in the organizations.
The methods I will be using in the report are both Primary and Secondary data collection.
For this research I will use secondary data.
Leading newspaper articles
Books related to Islamic life Insurance (Takaful)
The instruments which will be used in my research to collect primary data are:
I will be distributing questionnaires.
The sampling technique will be simple random sampling that will help in reducing the biasness factor in the research.
The scope of my research will be limited to students of universities in Peshawar because of time and other limited resources.
Scheme of the report:
The report will consist of the following parts.
- Literature Review
- Conclusion and Recommendations
Meaning of Takaful:
Takaful is a form of mutual assistance (Ta’awun) strengthened by aiding the ones who are in problems and deserve to be helped.(Dr.Masum) (2009). According to him, Islamic Scholars have begun to accept and conclude to the viewpoint that Takaful is according to Shariah principles. Numerous Islamic conferences are being held and Shariah Councils are emphasizing by creating awareness amongst the Muslims that Takaful operations are free from unIslamic elements thus the development of Takaful in the market is to cater to the needs of Muslim by providing them products and services in accordance to Islam.
“Overtime, greater understanding on the concept of Islamic Insurance has emerged as the concept of Takaful, based on the contract of Tabarru (donation) and Mudarabah profit sharing.”
“Takaful is an alternative form of Conventional Insurance based on the concept of trusteeship and cooperation inspired by the beliefs of the followers of Islamic teachings.’
Murtaza Ali (2007).
It can be concluded that takaful is an Islamic way of dealing with uncertainties via mutual assistance and it is social scheme developed on the principals of brotherhood, solidarity and mutual assistance.
Takaful is rooted from an Arabic word Kafal, which means that ones needs should be taken care of. According to this scheme participants jointly agree to bind themselves against damages caused by hazards.
“Takaful is a legally binding agreement between all the participants of the scheme to pay any of the members who suffers a loss as specified in the Takaful certificate”. (Dr.Masum)(2009).
Muhaimin Iqbal (2005), Abdul Rahim, Wahab and Kabir Hassan explain Takaful as a scheme that is derived from the concept of Ta’awun and the concept of Takaful is similar to Conventional mutual risk sharing. Takaful has a fixed maturity period and is considered long term saving tool. Apart from giving benefits of return it also provides a mutual financial assistance among participants.
“A Programme that pools efforts to help the needy in times of need due to immediate deaths or mishaps resulting in personal injury or disablement”. (Bank Negara Malaysia)
Scholars like Dr.Yusof Qaradawi (July 2007) state “Our observation that the modern current practices are objectable Islamic ally does not mean that Islam is against Insurance: it only opposes the means and methods.”
According to the author the Islamic insurance companies will use the contract of donations and provide compensation and the operation of the company shall not get engaged in any unislamic elements.
“Muslims were involved in Marine activities in the Mediterranean and Indian Ocean from the seventh century on”. Chaim-Vardit (2009).”
“The rough model of Takaful was practiced by Arabian tribes, holding to the principal of pooled resources to help the needy on the voluntary basis” Masum Billah (2001).
Tamim become the first insurance term in Arabic only in 20th century and it is believed that Ibn Abidin, a Hanafite Jurist who died in 1836,is the First Muslim to coin name Insurance Sukara (security) influenced by Italian term Siguare and Turkish Sigorta. Chaim-Vardit (2009).
Merchants of Mecca used to form a group of Mutual funds with a purpose to help the victims or survivors of natural hazards during their commercial ventures into Syria, Iraq and other countries. Such a practice was supported and even contributions were made by Prophet Muhammad (P.B.U.H) while trading with the capital of Hazrat Khadija. Aziz-Abdul (2005)
“The period lasting from the fall of Rome until the Dawn of Islam was the darkest, most corrupt and unsettled period in the known history to man. Hence the Dawn of Islam removed darkness from the face of life and brought the environment of security and stability to the areas which came under the influence of Islam.”
According to Chaim-Vardit, Shariah recognizes several transactions and institutions which function in a way similar to certain type of Insurance. The typical ones are:
- Daman (guarantee) is synonymous to “Kafala” is used with risk or responsibility that one bears with regard to property of which one enjoys profit.
- Daman Khatar al Tariq (guarantee against travel hazards). In this type of transaction, the person himself wishes to be compensated for a future possible loss.
- Wala al Muwalat-This type of transaction was prohibited by Prophet Muhammad (P.B.U.H). The problem was this type of transaction established new ties, as strong as blood ties, outside the family was unbearable.
- Diya (blood money)-compensation to victim or victim’s family for unintentional killing or bodily injury.
- Mudaraba-is not mentioned in Quran and there is much doubt whether it is mentioned in Hadith
- Zakat-means growth and purity. It is often mentioned as equal to modern social Insurance and there have been modern attempts made in Islamic states as Saudi Arabia and Pakistan to apply Zakat.
- The institution of Waaf (endowment)-the property endowed as Waaf was intended to support the poor, staff of mosques, hospitals, to maintain city facilities and the two holy cities.
- Jizya-tax levied on non-Muslims residing in Islamic State and provides then with security for their lives and property.
Holy Prophet (P.B.U.H) emphasised that a Muslim should protect itself from hazards and risks via transfering the risk through Takaful Model.The life of a muslim is Controlled and destiny by Allah (S.A.T) but it does not mean that a Muslim cannot protect itself but indeed a Muslim in Islam should gurad itself from misfortunes, hazards, risks and uncertanities.Dr.Masum (2001).
Types of Takaful Structures:
“There is no single “best” model that exists for takaful. Shariah scholars worldwide concur on fundamental components that characterize a takaful scheme, yet in their judicial opinions (fatwas), operational differences are tolerated as long as they do not contradict essential religious tenets.”
Ms Shakun Ashoka Raj (2007).
There has been a tremendous research done on the takaful models which includes work of prominent authors like Dr.Masum (2001), Hassan, Rahim and Wahab (May June 2007).
According to Hassan, Rahim and Wahab (2007) for the Mudarabah contract to be allowed and carried in Islam requires a number of elements to be present:
- The capital provider (participant);
- The entrepreneur (takaful operator);
- Capital an appropriate activity;
- Profit and loss sharing and offer and acceptance.
In the mudaraba contract, the two parties know as provider (rab ul maal) and the entrepreneur or takaful operator (mudarib) operates on a joint venture basis.
”An investment on a Mudarabah basis of 100 should at the end of the period give more then 100 to be termed as profit and for the operators to share that.”
The other takaful model is known as agency or wakala model. On the basis of this principal, a person delegates his right or business to the other people/person to act as his agent or wakil. The agent is responsible to contribute his knowledge, skills, and abilities in performing the tasks assigned to him in the best manner. According to Dr.Masum (2001) in the Wakala model the salary of the agent who rendered the services is subtracted against the fool of funds. The net funds will be used for the purpose of investment and profits will be distributed accordingly.
Similarly author Rahim, Wahab and Hassan “Under a typical wakala model, the Tabarru (donation) remains the property of the participants unless consumed, as they have the right to receive the surplus back and therefore it becomes a conditional gift.”
Tijari model (business) commonly uses both the pure Mudarabah and modified Mudarabah approaches. Dr.masum is of the opinion, that modified Mudarabah approach is used where deduction of expenses is taken into consideration and as result more expensive premium is charged from the participants in order to cover the operational expenses while on the other hand Pure mudarabah approach is used where there are no operational expenses charged.
Waqf model-this model operates on non-profit basis that collects donation from individuals or firms who willingly want to contribute something positive to the society. Social organizations and enterprise are engaged in such type of activity.
Shakun Ashoka Raj (2007).
Concepts of beneficiaries in Takaful
It is vital to test the beneficiary in the policy inorder to find that whether the beneficiary is the right person to be tranferred the benefits.In order to do so the following concepts are under taken :
- Al-Wasiyah (bequest)
- Al-Mirath (inheritance)
- Al-Milkiyah (ownership)
In the Takaful Model if the policy holder outlives the policy duration then under such circumstances the policy holder is entitled for the benefits and he is the only owner but in
Waqf model the sole owner is Allah (S.A.T) and no one can claim the property or benefits. Dr.Masum (2001).
After death of the policy holder the following stages are inoccured before the distribution of benefits of the policy.
- Wealth heald by the policy holder is adding with total benefits
- If there are any debts left by the policy holder then from the total weath those debts are paid off .
- For the remaining the funeral expenses will be deducted.
The remaining property or any thing left is disrtibuted under the principals of Al wasiyah and Al mirath.
Under the islamic principal the policy holder can give away via will 1/3 of the property. This is to reduces injustice that may be caused by the policy holder by giving his benefits not to his legal heirs .
After making payments of loan taken by Policy holder, excluding funeral expenses from the remaining property and cash left by the deceased and executing his will, the remaing benefits ,property and cash left is distributed among the legal heirs of the policy holder via Islamic methods.
CONVENTIONAL LIFE INSURANCE
Insurance is a medium via which people transfer the burden of uncertainty (financial loss) to the insurer, for an agreed financial attention known as “Premium”. In return, the issuer promises to provide financial compensation to the insured for particular loss occurring. The clients of the policy are known as policyholders.
Human life is exposed to risks of death and disability due to natural disasters and accidents. Property possessed by man is exposed to various man made and natural hazards. Simultaneously man himself is exposed to different diseases, deadly viruses, the cure for which involves huge expenses. A family might have to face serious financial and moral hazards as a human life is lost or a person is disabled temporarily or permanently.
If an individual’s property is damaged, it might result in decline in income of the individual.
Life insurance gives protection to an individual during his/her lifetime and after his death too. So we can say that it is an agreement that guarantees the payment of agreed amount of monetary benefit to the insured. There are number of companies offering Life insurance policies. The more the time period of the policy the greater its benefit e.g. if a person purchases a policy for the period of 10 years, he will get its benefit after 10 years but if he dies during this time frame, his family will get its benefit.
The insurance company reviews variables that are likely to affect the health and how long and individual lives after receiving an application by individual for life insurance policy. Actuary’s Statistical Analysis is performed by a person know as “Actuary” who determines whether the individual is a good “risk” to insure. Insurance premium is calculated, the older an individual, the higher the life insurance premium to be paid. Insurance premium can also be higher if an individual has health issues like higher cholesterol. If the insurance company agrees to provide insurance the agent will deliver the life insurance contract. The contract will include:
- The amount of money to be paid when the policyholder dies.
- How long the contract lasts.
- The amount of premium that needs to be paid by the policyholder.
The policyholder will need to name the beneficiary to whom the benefit of the policy will be transferred in the event of death of policyholder.
HISTORICAL DEVELOPMENT OF INSURANCE:
Insurance is as old as the development of human society. In a society there are two types of economies
- Money economy
- Natural economy.
Natural economy is more old then the money economy where people form community to help each other. For example if the house of a person gets burnt, the community members will pool in funds and reconstruct the house.
Money economy practiced the transfer or distribution of risk by the Chinese and the Babylonian traders in the 2nd and 3rd millennium B.C.
Achaemenian monarchs of Iran were the first to insure their people and that process was registered in the governmental notary offices.
Life Insurance primarily established to provide protection against risk and catastrophes to people who were dieing very early, people who were aged and people who as a result of accident were disabled.
This was practiced made possible by sharing and transferring risk with other individuals of the society. The idea of insuring oneself against risk is as old is mankind.
Early times in England, societies were formed. Relief to the family of members of the societies would be given by making little sum of payments, if the grains of the farmers were damaged. The first life insurance company was established in England in 1705 and named the Amicable Society for Perpetual Assistance.
Life insurance developed from these small beginnings into colossal industry, which gives people sense of security they require to maintain financial stability, moral and faith against inflation, deflation, wars, boom, panic and all sort of devastation. Life insurance gives individuals sound financial back up to move forward as it is based on scientific principles. Life Insurance companies were the only companies to pay their dues fully and survive the crisis of recession while the banks and other investment companies failed to do so.
The purpose of selling life insurance is to make sure that it provides fresh air to people to start a life. In the larger view the life insurance policy becomes the reason for the beneficiary to begin a new life. Life insurance does active saving, utilization of funds and reserves for hazards and opportunities. It is a medium of savings, protection and growth and it has given people peace of mind and financial soundness.
TYPES OF LIFE INSURANCE
There are many different classification of life insurance each satisfying different need of individuals. Life insurance can be broadly divided into two main types:
- Term Assurance
- Whole Life Assurance
It is the least expensive Insurance and is available in various forms. This form of insurance is opted if the individual cannot afford other types of insurance or when
temporary protection is needed. The premium from this type of insurance is free from element of investment. Term Assurance policy in case of death of policy holder during the specified years is bounded to provide lump sum amount of agreed money but if the individual outlives, then in such circumstances the contract is ceased and no money is to be provided to the policyholder.
Term Life Insurance policy lengths for:
- One-year term policy- promises to pay the beneficiaries of the policyholder the agreed amount of money if the insurer dies within one-year tem policy.
- Five years – promises to pay the beneficiaries of the policyholder the agreed amount of money if the insurer dies within five-year term policy.
- Ten years, fifteen and twenty year term policy is also known as long term policy.
TYPES OF TERM ASSURANCE:
- Renewable term life policy –In this term life policy, the policyholder automatically qualifies to continue the policy when the specified time of the policy ends.
- Non-Renewable term life policy- this term life policy, the policy holder does not automatically qualifies to continue the policy when the specified time of the policy ends instead the individual has to re-qualify for the policy by undergoing physical examination in order to determine the health condition.
- Convertible term life policy-In this type of term policy the insured has the choice to covert this type of policy into permanent life insurance policy into variable insurance, whole or universal life insurance.
- Non-Convertible term life policy- simply means that policyholder cannot switch the policy to another type life insurance policy.
WHOLE LIFE INSURANCE:
This policy last the whole (entire) life of the insured. If the policyholder stops paying the premium he/she can get the benefit paid till date. Because of this reason it is an expensive life insurance policy. For example the funeral policy in which expenses are covered for the funeral of the person passed away. Full payment for the policy is taken at the time of purchases of policy.
Whole life insurance policy can be divided into two types:
- Ordinary Life Insurance
- Limited Payment Life Insurance
Ordinary life insurance:
It is also know as straight life insurance. In this type of insurance policy the insurer is give lifetime security. For example if the insurer is alive at 100, then he is to be paid the benefit if the policy or the agreed amount of money. Under this policy of life insurance the policyholder is charged high premiums in the start of the policy and charged less premium during the last years of the policy. The life insurance company invests the premium of the policyholder to accumulate a cash surrender value. The policyholder can withdraw from the policy by taking the cash value or borrowing cash value at lower interest rates. The cash value is relatively small in the start of the year and increases with years.
LIMITED PAYMENT LIFE INSURANCE:
This life insurance policy is also known as “limited pay life insurance” in which individual pays for the specific time period and enjoys the policy for the rest of his/her life. The face amount of the policy is paid tax free to the beneficiaries the policyholder mentioned. This face amount can be paid on monthly basis or in lump sum amount. If the
Policyholder mentioned to make payment to the beneficiary on monthly basis then the policyholder has four options to choose from:
- Life Income-In this policy the beneficiary of the policyholder is paid on the monthly basis as long as the beneficiary lives.
- Fixed Period Income-In this type of policy, the policyholder asks the insurance company to pay the beneficiary after his death the proceeds in equal amount over the period of ten years. The years determined are dependent on the wish of the policyholder.
- Fixed Amount Income-In this type of policy the policy holder asks the insurance company that after his death the nominated beneficiary should be paid lets suppose Rs.1000 a month till the proceeds are exhausted
- Interest Options-In this the policy holder asks the insurance company that after his death the benefit of the policy should be reinvested by the insurance company and the interest from the investment made should be provided to the nominated beneficiary each year.
OTHER FORMS OF LIFE INSURANCE:
- Endowment Life Insurance- This policy is for a specific time period. The face value is paid to the nominated beneficiary if the policyholder dies during the specific period but if he is alive then the policyholder is paid the benefit of the policy.
- Variable Life Insurance-This policy is for the whole life. The policyholder is given option to decide the amount he wants to invest in life insurance and the amount he wants to invest in other investment opportunities like buying stocks. It has a guaranteed death benefit, which is based on forecasted interest rates. Theses rates are not fixed indeed vary from company to company.
- Universal Life Insurance-This policy charges less premium in the start but does not provide death benefit or cash value as this policy is flexible in terms of premium payments and timing.
- Second To Die Life Insurance- This policy is designed for couples.(married).The benefit of the policy is provided to the heirs of the policyholders only when the surviving spouse dies.
- Juvenile Life Insurance-The purpose of this policy is to provide safeguard to the children. The guardian or the parent of the child purchases policy in order to secure the minor from mishaps.
- Modified Life Insurance Policy-In this life insurance policy higher premium are charged at the later years of the specified time. It is suitable for those individuals who believe that their salary/income will increase in the future.
METHODS FOR PROVIDING LIFE INSURANCE PROTECTION:
There are two methods that are actively used to provide life insurance to individuals.
- Annual Renewable Term
- Level Premium method
Annual Renewable Term:
This type of life insurance policy has overcome the challenge of insurability simply meaning that the policyholder can renew the policy without under going medical examination or providing sound health evidence. Because of poor health or other mishaps the insurer might not be allowed to renew the policy. So annual renewable policy (ART) ignores the insurability element, they simply pay the renewal premium. The policy period varies from 10 to 30 years and for the till the age of 95 mostly. In such policy the premium to be paid is much higher then other life insurance policies. The more the age the higher the premium to be paid and thus the greater the return on the policy. The premium is calculated by determining the death rate of each age group.
A group of 1000 males (non-alcoholic) at the age of 40 wants to get a life insurance for $1000.The death rate of males at the age of 40 is .332% out of 1000.This means that the insurance company would have to pay $.3220 for the death claim. The insurance company would have to collect $.3.20 from each policyholder in order to cover the death claims.
The yearly renewable insurance premium increases, as the individual gets older. Premium sharply rises during the later years, because as the age grows the death rate also grows.
LEVEL PREMIUM METHOD:
In this type of life insurance policy the premium remains the same for the agreed number of years. The time frame varies from 10, 15, 20 to 30 years. This life insurance policy provides insurance to age 100.If the insurer survives till the age of 100 then the face value of the policy is paid to the policyholder. The premium charger in the early age is higher in order to cover for the morality expenses.
Level Premium method is also know as ‘Legal Reserve” because the money invested by the company is according to the state law. The state requires the company to maintain a minimum amount of liquid so that it is able to pay for the agreed claims. The legal reserve that the insurance company maintains is equal to the present value of the future death claims minus present value of future premiums. The main objective of the legal reserve is to provide lifetime security. The policyholder has an option to withdraw from the policy by just taking the cash value which is less then the legal reserve because of deductions of expenses like sales.
UNISLAMIC ELEMENTS IN CONVENTIONAL LIFE INSURANCE
Conventional insurance contains the elements that are unacceptable in Islam which include
Riba –also termed as interest, is present in conventional life insurance. Loans granted by companies are charged on interest. An insured upon his death receives greater then he has paid. This is not permissible in Islam. Insurance funds stocks/bonds contain the element of interest
“Those who eat riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say, “Trading is only like riba or usury, whereas Allah has permitted trading and forbidden riba. So whosoever receives an admonition from his Lord and stops eating riba shall not be punished for the past; his case is for Allah (to judge): but whoever returns to riba, are dwellers of the Fire – they will abide therein. “Al-Quran, Al-Baqarah (2). – 275
Maisar- It refers to gambling or game of chance. Gambling of all forms/types is prohibited in Islam. The gambler tries to win mass wealth without making an effort. When the policyholder dies after only paying a small amount of premium his/her nominated beneficiary receives the benefit in term of monetary, which the policyholder has no idea where the amount has come from.
Al-Maisir is referred to in the Quran as follows:
“O you who believe intoxicants (all kind of alcoholic drinks) and gambling, and Al-Ansab (ways for seeking luck) are an abomination of Shaitan (Satan). So avoid strictly all that (abomination) in order that you may be successful.” Al-Quran, AI-Maidah (5): 90
Uncertainty -It is an element which is termed as gharar, is prohibited in Islam. In business terms gharar means undertaking business deals which are riskier and individuals do not posses sufficient knowledge about them. A contract which contains uncertainty due to:
- Occurring time is not known.
- The amount payable is not known.
- Whether the payment will be accepted as agreed.
HARAM/HALAL-Islam does not allow individuals to invest money in unIslamic activities. Insurance companies may invest in bonds or tobacco companies or any unethical activity which is not permissible in Islam then taking insurance from such companies is considered haram.
ISLAMIC LIFE INSURANCE
The transaction of an Islamic life insurance system aims to protect the life of widows, orphans and the dependents of the deceased against future risks and hazards. It follows the principal of Al-Mudaraba financing. Under this principal the insured and insurer mutually agree to co-operate. The insured dependants are protected of future hazards as well as donations are made for the uplift of poor individual who face accidents in Islamic society. This concept was present and practiced during the times of Holy Prophet (P.B.U.H). In Islamic life Insurance policy the nominee is just acting as a trustee and is not considered the absolute beneficiary. The purpose/responsibility of the individual nomination (nominee) by the assured is to distribute the benefit to the heirs of the deceased under the principal pf Mirath and Wasiyah. In Islamic life insurance policies there are two situation in which the benefits of the policy are transferred i) the insurer can claim from the insurer the benefits if he outlives the time mentioned in the policy a) the paid premiums b) the profits made upon the paid premiums and c) the dividends/bonus made according to the company policy. In the other situation if the insured is not alive or passed away during the policy, the benefits are transferred to the nominee (selected by insured) and it is mandatory for the nominee to distribute the benefits of the policy among the heirs of the policyholder. The benefits include a) paid premium b) profits made on the paid premiums c) bonus/dividends make the company policy and d) donations from the company’s charitable funds according to the policy selected by the assured. The benefits of the Islamic life insurance policy are not just claimed by individuals who face natural death/accidents but the benefit are also provided to people insured and passing in unlawful death example suicide/murders. The reason for that is life and death can only be det