Conventional Insurance vs Takaful: What Are They?
- There are a few differences and similarities between conventional insurance and Takaful.
- Insurance and Takaful are essential for financial planning.
- Muslims are advised to purchase Takaful.
- Non-Muslims are welcome to purchase Takaful.
A wise person once said that the only certain things in life are death and taxes. But if you really think about it, there’s one more thing that’s just as certain: financial losses. Whether it’s a car accident, a critical illness, or a fire, at some point, we all face unexpected expenses. And that’s where insurance comes in.
What is insurance?
At its most basic, insurance is a written contract in which one party agrees to protect another from financial losses. The insured party must pay their premium on time and file a claim within a specified timeframe in exchange for this protection. The specifics of the contract vary depending on the type of insurance, but all policies contain certain essential elements. For example, most policies will have a clause specifying the losses covered and those not covered.
What is Takaful?
Simply put: Takaful is Islamic insurance. It is similar to insurance, but it is based on Islamic law principles. As such, it is not just for Muslims; non-Muslims can also subscribe to Takaful benefits.
What are the differences?
|How does it work?|
|A contract between two parties to get protection||A promise between members of a community to help each other in times of need|
|Where are the funds invested in?|
|Any legal investment||Any shariah-compliant investment|
|Where do the profits go?|
|Shareholders||Participants and operators of the Takaful fund|
|Commission fee of 2%||Wakalah charge depending on the product|
|Insurer||Among the participants|
What are the similarities?
|What is it?|
|A way to safeguard ourselves against the unexpected misfortune|
|Types of insurance offered|
|Car, medical, life, home, travel etc.|
|Who can buy it?|
|Tax relief claim|
Importance of insurance and Takaful
They are a safety net against financial losses, and we all hope we never have to use them. But when life throws us a curveball, it’s good to know that our policy will help cover the costs. For example, if a person becomes sick or injured and cannot work, medical insurance or Takaful will help pay for their medical expenses. Similarly, if a business suffers damage to its property, it can help cover the lost income. The bottom line is: insurance and Takaful are an essential part of financial planning.
The reason why Muslims are advised to purchase Takaful
Conventional insurance is often not compatible with Sharia law due to its inclusion of these three elements: gharar, riba, and maisir.
The element of uncertainty in the contract. The contract should be clear, and there should be no ambiguity.
The element of interest. In insurance, the insured pays a premium, which the insurer uses to cover claims and make a profit. The insurer makes a guaranteed profit, regardless of whether there are claims.
The element of gambling. The insured is gambling that they will have an accident or their property will be damaged, while the insurer is gambling that they will not have an accident or their property will not be damaged.
It is a much more suitable option for Muslims who wish to obtain insurance complying with their religious beliefs.
Advantages and disadvantages of insurance and Takaful
If you’ve ever found yourself asking the question, “Should I get conventional insurance or Takaful?” then you’re not alone. When it comes to insurance, there is no one-size-fits-all solution. Conventional insurance and Takaful both have their pros and cons, which comes down to what an individual prefers.
Here are the advantages and disadvantages of conventional insurance:
|Offered by more insurers||Profits go to shareholders|
|Fixed commission fee (2%)||Includes non shariah-compliant elements|
|Investment-linked plan is available||Premium rate depends on risk assessment|
Here are the advantages and disadvantages of Takaful:
|Shariah compliant||Offered by limited insurers|
|Profits go to participants and operators*||Wakalah charge depends on the price of the product|
|Fixed premium rate**|
|Umrah and Hajj Takaful plan is available|
*Amount for operators can’t be higher than participants
**Unless you’re with severe health issues
Can non-Muslims purchase Takaful?
When it comes to Takaful, everyone is on an equal footing. Whether you’re Muslim, Christian, Buddhist, Hindu, or atheist, you can purchase a policy and enjoy the same benefits. Takaful is not a religious product but a product designed to protect everyone in an unexpected event, regardless of their beliefs. And that’s something we can all feel good about.
Where to purchase insurance and Takaful
For fast and hassle-free service, you can purchase insurance and Takaful through PolicyStreet!
How to purchase insurance and Takaful
- Decide on what type of coverage you need.
- Decide whether you want conventional insurance or Takaful.
- Do some research on insurers.
- Choose three preferred insurers.
- Ask for quotations.
- Compare the coverage and price.
- Provide your details and relevant documents.
- Make payment.
If you’re looking for a Shariah-compliant and inclusive insurance solution with a fixed premium rate, Takaful is the way to go. However, if you prefer a more comprehensive selection of insurers and a fixed commission fee, conventional insurance may be a better option for you. Whichever route you decide to take, make sure to do your research and find the best insurance policy for your needs. Ultimately, it all depends on what you’re looking for.
Still confused? You can get your insurance with PolicyStreet and leave all the headaches with us. Get the quotation for your personalised insurance plan within 5 minutes with the best price!
Related: Differences between Conventional and Islamic Credit Card | What Exactly is Hibah Takaful in Malaysia?