Takaful vs Conventional Insurance: What's the Difference?
Author Avatar


You might have some idea about takaful insurance representing Islamic principles and that conventional policies are commercial products, and you would be right!

But let’s take a closer look to see how else they differ:

Takaful Conventional Insurance
What is it? A co-operative policy where funds are contributed by donations from participants. The pooled funds can be used to protect other participants from risk. A policy that shifts the risk to the insurance company. You pay a premium to receive coverage.
Who Can Buy This Policy? Anybody Anybody
How Are Pooled Funds Invested? Operators will only invest in syariah-compliant instruments which are free of gambling, usury and uncertainty* Insurance companies are free to invest in legal instruments like stock, bonds, etc.
What Happens to The Profits or Surplus? It is shared among the participants and operators of a takaful fund. Dividends are returned to shareholders
*The practices of Gharar (Uncertainty), Maisir (Gambling) and Riba (Usury) are prohibited by syariah law.

Now you know what sets them apart in principle, but what does it all mean for you? Here are the answers to common questions you may have about takaful and conventional insurance.

Takaful vs Conventional Insurance: What's the Difference?

What Is My Premium or Contribution Breakdown?

There is a difference to how the premiums and contributions are used with these policy types. For instance, with life takaful plans, contributions are typically divided into two accounts. The first is the Participant Special Account which is where the payouts and benefits come from and the second is the Participant Account, a savings and investment fund. When your policy reaches maturity, you will be entitled to your share of the fund based on your contribution.

This is similar to investment-linked conventional insurance policies where a portion of your premium goes towards investment and the rest to your coverage and other charges. However, whole life, term and endowment conventional insurance policies typically put your premiums towards coverage, after commission or admin charges have been subtracted.

Is Takaful or Conventional Insurance Cheaper?

One isn’t necessarily cheaper than the other, but in terms of ‘extra risk premiums’, takaful insurance may be better in terms of cost. This is because takaful fund rates are generally fixed and people deemed to carry extra risk aren’t typically charged more, unless in severe situations that would cause losses to the entire fund.

For instance, with medical takaful, someone with severe health issues may be asked to increase his contribution accordingly. Conventional insurance will charge more where extra foreseen risks are present (e.g. people with dangerous professions and smokers, etc.).

How Much in Extra Fees Do I Have To Pay For Each Policy Type?

Conventional insurance typically charges a fixed commission fee of 2% whereas takaful operators might impose a ‘wakalah’ charge depending on the product and model.

The wakalah charge is similar to a service fee. For instance, with Prudential BSN takaful Protect, the initial charges in the first year start at 75% of your contribution and reduce gradually till it reaches 0% in the seventh year.

Do Takaful and Conventional Insurance Policies Offer Different Types of Products?

Both types of policies offer a wide range of products for motor, health, life, home and travel insurance as well as many other types of protections. Conventional and takaful insurances offer standalone plans as well as rider options.

However, additional takaful products might cater to special Islam-related activities. For instance, Muslims might appreciate Hajj and Umrah takaful plans that cover travelers making the pilgrimage for travel inconveniences, medical expenses and accidents.

What Kind of Extras Can I Look Forward to?

For takaful, apart from profit sharing and surplus payouts for participants in the fund, the extra perks differ from plan to plan and can be quite attractive to different people for different reasons.

For instance, those wanting to save money will appreciate a medical takaful plan that offers cashback for no claims.

Did You Know?

Premiums and contributions for both conventional and takaful policies can be claimed for tax relief for medical, life and child education policies. If you are looking for insurance plans, whether conventional or takaful-based, do have a gander at our comparison page first to discover the most affordable plans with the best terms.


5 1 vote
Article Rating


Comments (2)

Notify of

Inline Feedbacks
View all comments
1 year ago

is life Takaful compliant with the shariah?

Pang Tun Yau
1 year ago
Reply to  Brook

Yes, it is. that’s the main difference between life insurance and life takaful.

Top Insurance Articles
Post Image
Government and Private Hospitals in Malaysia: How Much Do They Really Cost?
- 2nd January 2018
We keep hearing that government hospitals are cheaper than the private ones, but what’s the price difference really like? Keep reading to find out!
Post Image
How To Claim Income Tax Reliefs For Your Insurance Premiums
Alex Cheong Pui Yin
- 23rd March 2023
There are quite a few types of tax reliefs that you can claim to reduce your chargeable income […]
Post Image
Cancer Treatment In Malaysia: How Much Does It Cost?
- 2nd October 2018
Many know the devastating effects of cancer, but few talk about just how expensive cancer treatment costs can be.
Post Image
The Ultimate Guide to Buying Your First Insurance Plan
Desiree Nair
- 20th March 2017
Having problems buying your first insurance policy? We’ll set you straight on the know-hows of buying the most suitable insurance policy to suit your needs.

Related articles

Related Posts Image
Related Posts Image
Related Posts Image
Related Posts Image