Takaful vs Insurance

A prevailing misperception about Takaful is that it is simply the Islamic version of traditional insurance, and thus is confined to those of the religion. The truth is, not only is Takaful open to anyone regardless of religion or creed, it is a financial management tool that differs in certain aspects from traditional insurance. Used wisely, Takaful can lead to better financial security and peace of mind knowing that you would be part of a risk management system that firmly upholds principles. Here we explore the differences between Takaful and conventional policies, and what they would mean for you.

How do they compare?
Both Takaful and conventional insurance policies work on the same basic system, which is the pooling of funds to manage the risk of a group of people. Having said that, there are major differences in the workings of the two systems, stemming from the fact that Takaful adheres strictly to the Islamic principles it was developed upon. Let’s explore the major differences.

Participants’ Intent: while there’s little doubt that Takaful serves a financial security purpose, its policy buyers enter the agreement to largely donate towards a fund that can potentially help assist those who experience unfortunate circumstances and need financial assistance. In contrast, conventional insurance policies are purchased as one’s personal financial security, with the insurance company as the risk-bearer.

Investments: while the conventional investment units of insurance invest based on their assessment of what fits their profiles, Takaful investments follow strict principles. They cannot invest in anything containing elements of gambling, uncertainty and usury (practice of lending money at unreasonably high interest rates). This is regulated by Shariah requirements specified by the regulator.

Returns: should there be surplus monies due to low claim rates, it would be distributed among the participants, while profits from investments are distributed to participants and shareholders, adhering to pre-defined models. Takaful operators does take some gain from surplus by way of performance fee or sharing of surplus. However to ensure legitimacy, the total amount of remuneration from surplus payable to the Takaful operators should not exceed the amount of surplus paid or accrued to participants. In conventional insurance, surpluses and profits belong to the shareholders of the insurance companies.

Takaful in Malaysia Today
In Malaysia, in comparison to many other countries, Takaful companies are heavily regulated through Shariah requirements under the Islamic Financial Services Act 2013, separately from conventional insurers. Not only are they closely watched to prevent wrongdoing, their investment portfolios are dictated to ensure zero violations of Islamic values, as well as secure, liquid and long-term components. The industry is developing and evolving steadily to promote best practices and greater professionalism, while strictly adhering to its fundamental Islamic principles.

Source: www.loanstreet.com.my