What is Takaful
Takaful Islamic life insurance is an agreement where a group of people, called participants, come together to protect each other against specific risks. They each contribute money to a pooled fund, which is then used to compensate anyone in the group who faces those agreed-upon risks.
This is an Islamic fund with shari’a and its management has been done so well to make certain amount of profits. It means that all the people in the group take risks, besides that every member of it has his or her own responsibilities.
In this model, Takaful works with a small group of participants and a manager who handles daily operations. If the group is larger, it might be started by a promoter, a specialized company called a Takaful Manager, who then oversees everything.
Key Principles of Takaful
Mutual Cooperation:
Ideally, Takaful entails working hand in hand through which players in the market support each other. To comprehend how people team up for action, we may state that people provide support to one another if necessary. It is like a family where everyone plays a role, and if somebody has issues, the rest of the family is there to support them and ensure they are not struggling.
Prohibition of Riba (Interest):
Similar to the prospect of participating in profit loss sharing, Takaful does not permit the charging or receiving of interest referred to as riba. This equates to saying no interest can be involved in any transactions.
They are targeting to provide assistance to each other and ensure that they make sound investments, especially the ethical investments that will not make them required to make any interest from the money.
Risk Sharing:
In the risk sharing concept of Takaful, every participation opens an account in a pool fund. In other words, if anyone suffers a loss within the context of the flights, the fund and cushion it.
This way, everyone is in support of each other and the risk is shared by everyone thus minimizing someone to single handedly suffer the losses.
Ethical Investments:
Ethical investments in Takaful are referral to the investment on firms that are into business using techniques that are in line with Islamic laws.
This is stuff like not taking alcohol or gambling as part of your entertainment programs. It is all about being purposefully rational in the ways we act that align with the principles we hold.
Types of Takaful
Family Takaful:
Family Takaful (Islamic life insurance) contracts come in different forms, each designed to meet specific needs: Family Takaful contracts come in different forms, each designed to meet specific needs:
Individual Contracts: These are long-term contracts that entail assisting people set aside to cater for certain probabilities that may occur and these include being sick, being disabled, getting a terminal disease, reaching a retirement age , or had bearing children.
Collective Contracts: It is a contractual arrangement made by two or more organizations where one group is listed to protect their members during certain events or specific dangers.
Mortgage Contracts: These contracts enable one to pay a loan in the event that the borrower cannot repay by virtue of some hardship. It includes temporary, medium-term, and long-term inventory management strategies.
Savings Contracts: As with any mortgages they are created to assist with repaying loans but with a focus on savings. As for recession, they come in short term, medium term, and long term.
General Takaful:
Takaful is something that can be compared with a common insurance company; it is general Islamic life insurance. It is not insurance that means you go and buy something but rather a need to assist one another.
Just picture the scenario where you and your group of friends decided to create a clan where each of you contributed some amount of money into the pile.
When you are in need of some extra cash for instance when one has fallen ill or has been injured the money put in the pot is taken to address these problems. It worked as if it was acknowledge everyone is in a group and therefore everyone has a share in a safety net.
And on top of it, we have General Takaful, and there is a special type called Family Takaful. This is all about providing for the family’s needs in the unfortunate event that something severe happens, for instance, death or loss of job due to a sickness or a condition that makes one develop a disability.
Just as the name suggests, Family Takaful provides an avenue where families can save money over time for the benefits of the family; in events like situations, which may call for payment of medical bills or for a family to be supported after the bread winner has died, the saved amount is available.
All in all, General Takaful is means of guarantee that people have an insurance system in following the Islamic laws and regulations, and Family Takaful is a system that provides aid and support to families in times of need through the process of mutual cooperation among them.
What is family takaful? How Family Takaful Works
Family Takaful (Islamic life Insurance) also known as Family Micro-Insurance refers to an Insurance scheme that has been structured with consideration to the Islamic laws. It’s really emphasizing the idea of people helping each other as well as sharing risks.
The term ‘Takaful’ has been derived from an Arabic language and it refers to support or safeguarding of each other’s requirement. For instance, when the Takaful group encounters an unexpected event and is in need of some funds, they can seek help from a fund that is contributed by all individuals. This fund operates like a saving in which all contribute towards the cause and in case of hardship, your friends help you out.
Shariah compliant insurance or Takaful insurance is a kind of insurance that is designed on the Islamic principles of Takaful or mutual assistance and contributions. It does so in compliance with the principles of Sharia, or Islamic law as they are commonly called.
Mutual Assistance:
Takaful insurance on the other hand is different from the conventional system of insurance where you pay a premium to an insurance company and money is collected in one pot. Such money assists anyone who encounters a hitch with the insurance finding a solution. On that note, if a person requires financial assistance due to a problem that the policy provides for, he can sort it from this pot.
Risk Sharing:
Takaful operates on the concept of shared risk. When a participant faces a covered loss, the financial burden is distributed among all participants in the Takaful pool. This ensures that no one person bears the full financial impact of a loss alone.
Tabarru
When people put money into the shared fund, it's like giving a gift to help others. This gift, called "Tabarru'", is given freely, with the purpose of helping anyone who needs it.
Investment of Funds
The funds contributed by subscribers are managed strictly in accordance with the sharia law. For the avoidance of doubt, it has invested in what is called Shariah compliant papers such as Islamic bonds and ethical stocks.
If these investments turn generous, the returns are also shared among the people who are involved in Takaful, making it even more advantageous for all concerned members.
Surplus Distribution:
At the end of the year, if there's extra money left in the Takaful fund after paying for claims and expenses, it's shared out fairly among all the people who are part of the Takaful
Benefits of Family Takaful
Takaful family is a type of Islamic life insurance on the life that is associated with several advantages that are suitable for Muslim families. It does not demean them or disregard any particular need or value of theirs that may be different from the majority.
(1)Financial Security
Financial security is defined as having adequate cash resources to put food on the table for oneself as well as the family members and for any emergencies for at least one’s own life. It does so through the processes that will be discussed within this paper Known as Islamic life insurance.
I also never thought of investing as being safe because the money is safe. For instance, if there is a need to develop money for something like an illness or even burial of a family member, Islamic life insurance is available to complement.
It makes sure that you and your family members are safeguarded when things get hard because everyone in team works together and contributes his or her part, and then share the burden in case something goes wrong. That’s typical to have the back-up of funds and know that this money will be secure and will unburden your future.
(2)Savings Component
Some Family Takaful plans also let you save or invest your money. This means you can get back some of the money you put in as you go along.
The savings part of Islamic life insurance is like a piggy bank for the future. When you pay into your insurance, some of that money goes into a special account that grows over time. So, Islamic life insurance not only keeps you safe but also helps you build a nest egg for your dreams.
(3)Ethical Compliance
Ensures that all aspects of the insurance are in line with Islamic values and laws.
As a concept, ethical compliance in Islamic life insurance means acting in a proper way that is in line with Islamic religion and principles. It is all about the perfect correspondence of everything in the insurance with the attacking good values, such as honesty or fairness.
Hence, when you own an Islamic life insurance, you are confident that it is being operated from a sound Islamically appropriate perspective.
Comparing Family Takaful with Conventional Life Insurance
Most amin of informing gets dizzy while explaining meaning of family takaful and regular insurance. In the course of the current article, it is our intention to unfold the distinctions between the two aforementioned choices. This should make it easy for you to choose the one that’ll be most appropriate for you.
Let’s discuss about all these types with respect to how it operates, the benefits associated with using that type, drawbacks of using that type etc. Before we finish, hopefully you are better able to understand the distinctions and make the decision as to which one matches your needs better.
While choosing between the family takaful and the regular life insurance you need to know that they basically give your family some protection if anything happens to you. But what are the essential features that distinguish one type of grants from another one?
What is conventional life insurance?
In traditional life insurance the process is relatively straightforward: you enter into an understanding with an insurance company. You make fixed contributions, normally referred to as premiums, and in exchange, the company will provide a lump-sum to your family or other contributors in the event you die.
This assists in making sure that your loved ones have been well provided for in the event that you pass on. There are three types of conventional life insurance depending on the way they are underwritten. Term insurance provides you with a fixed term of say 10, 20, or 30 years and then expires.
In the event of your death in this period, your nominated beneficiaries are entitled to the payout. Whole life insurance remains active until the time of the policyholder’s death, and also accumulates cash value over time.
This can be said to be one of the insurance types that have been categorized based on risk and profit. It buys and holds assets such as investments by using the money received from the premiums so that it can make a profit.
This does not however go well with the tenets of their religion hence they seek other solution like Islamic life assurance. Takaful, otherwise referred to as Islamic life insurance, is a type of contract based on mutual help in which all sharers bear the risks; thus, it is right for those with certain ethical and religious beliefs imposed on them.
In other words, ordinary life insurance is a tested and reliable means of securing the financial stability of the-family but to protect which type of insurance is suitable for you to consider its principles and parameters.
Differences between family takaful & conventional life insurance
About the two, while family takaful is a type of insurance and better known as Islamic life insurance, conventional life insurance is an insurance policy whereby customers pay an agreed amount of money either monthly or yearly for protection and financial security of their loved ones in the event of their demise. Therefore, the following distinctions would be crucial to analyze so that the best decision could be taken. A brief research can also assist you in determining the best strategy to adopt in order to arrive at the right decision.
Principles and Structure:
The principles and structure of both plans are basic and in line with what has been discussed in the literature review for family takaful and conventional life insurance. Takaful in relation to the family involves pooling of resources where each party contributes in towards the help of other.
This is after applying the code of Shariah in the conduct of the operations for Islamic life insurance. Traditional life insurance is unlike this; you submit your premiums to an insurance company and in return the company invests from the premiums and makes profits from both the investments and the premiums while paying out claims from its own pocket.
By understanding these differences, then it becomes easier to Distinguish and select the most appropriate option of your preference.
Investment Approach:
In family takaful, your money is invested in a way that follows ethical guidelines, like avoiding industries like alcohol and gambling.
This is important for those interested in Islamic life insurance. On the other hand, conventional life insurance aims to make profits through different investments without these specific rules.
Knowing this helps you choose the right option based on what matters to you. If you're looking for Islamic life insurance, family takaful's investment approach might be more in line with your values.
Profit and Surplus:
Extra money is dissimilar provided in family takaful and conventional life insurance. The balance of funds at the end of the year or after payment of claims other than returning the premium to the participants is reinvested either to be divided among the participants or used to offset future costs.
This stands in contradiction with the Islamic life insurance principles. In conventional life insurance, the excess of premium also go the share of the owners of the insurance company. It makes it easier for you to go for the right option whenever there’s a differentiation between the two.
In case you support the concept of sharing profits and adhesion to ethical conduct, the traditional model of family takaful can be considered as more suitable.
Risk and Responsibility:
But in the case of family takaful and the conventional life insurance there is a distinction of how risk and responsibility are managed. As for family takaful, the risk of spending is borne in a collective mode where members assist each other financially.
This is in line with the Islamic principles for life insurance. If the amount of money within the fund reduces below a specific level, then participants may be required to add their money into the fund to supplement that which had been spent.
Adult life insurance on the other hand is normal life policy in which the insurance industry bears the risk and makes payments. It is possible to know which option is appropriate from the other by taking into consideration the differences that I enumerate above. If you prefer to have the load-bearing shared, then family takaful can be more appropriate in your case.
Ethical and Religious Considerations
Like in any insurance product, there are some ethical and religious issues that one has to consider in selecting between a takaful product and conventional life insurance.
Takaful for family conforms to the principles of Islamic insurance, even if various aspects of this insurance are aimed at ensuring adherence to Shariah law.
This means NO investments in products that include alcohol and other related products such as gambling products. You now see that conventional life insurance does not have these rules and is more oriented towards making a profit.
Understanding such differences will help you select the right course of action regarding your value/belief system. However, if adherence to ethical as well as religious standards is valued by you, Family Takaful will prove to be a better form of insurance.