24th September 2021 - 6 min read
While most of us would instantly understand the concept of insurance, many also generalise or over-simplify the concept of takaful as a Shariah-compliant variant of conventional insurance. In reality, despite the objective being similar, the takaful concept is actually quite interesting.
Takaful is financial planning and coverage that’s compatible with Islamic law. If you take up a takaful certificate, your money or donation is pooled with that of others, and managed on your behalf by a takaful operator. There is growing interest in takaful coverage in Malaysia, where takaful penetration rates have increased from 14.8% in 2017 to 16.4% in 2020, and is expected to continue its upward trajectory in the coming years.
However, there are still many people who are still uncertain about what it really is. Some people assume that takaful is an Islamic product open only to Muslims, while others believe it is a bundled version of insurance (since a majority of takaful companies offer family takaful products).
So what exactly is takaful coverage, and how does it work? Let’s start with a simple breakdown of the terminology and concept, before covering other aspects of takaful products available in Malaysia.
The concept of takaful is derived from Islamic teachings based on the spirit of brotherhood and love for one another. While conventional insurance is in no way illegal, there are certain aspects of it that breach Shariah ruling. Conventional insurance involves a straightforward sale and purchase of an insurance contract. While Takaful is an arrangement based on Tabarru’ contract (donation) and mutual assistance.
The contract involved between a Takaful operator and its participant is known as Wakalah and it must be free from Riba, Gharar, and Maisir. What do these Arabic words mean?
Riba – Refers to any increment incurred upon specific usurious items and upon debt, due to the deferred payment term. Riba in insurance can be found when the insurance company pays a sum of money to the insured who has suffered with peril where the amount of money paid by the insured to the insurer is not equal to the compensation received.
Gharar – Refers to uncertainty in regard to the subject-matter being contracted where in insurance, Gharar is triggered the insured purchases coverage for the insured event that may occur or not.
Maisir – Refers to elements of gambling or games of chance where in insurance, the insured loses the money paid for the premium when the insured event does not occur, and the insurer will be in deficit if claims are higher than collected premium.
Gharar and Maisir are very much interrelated, in that they correspond to anything that leads to too much uncertainty and an inability to clearly define terms or conditions of its dealings in the insurance contract.
To simplify how their investment portfolios work, a takaful provider can only invest in Shariah-compliant businesses and are not allowed to invest in companies that deal in interest, alcohol, gambling, or provide too much uncertainty.
Just like conventional insurance policies, takaful certificates require an individual to set aside some funds for the coverage provided in the certificates. However, takaful certificate owners donate money through contributions, in the spirit of mutual protection and cooperation.
These donations are known as Tabarru. The donations are pooled and managed by the takaful provider to support those in need, similar to the concept of risk pooling in conventional insurance. Whenever an unfortunate incident happens, the pool uses its resources to provide financial aid to the unfortunate few. This pool, of course, is constantly replenished from the donations made by the takaful certificate owners.
Meanwhile, the takaful providers invest these funds to generate returns through Shariah-compliant methods. Some of these returns are also passed back to the certificate owners in the form of rebates upon renewal of their plans.
As such, takaful products are in no way inferior to conventional insurance products – they both offer similar levels of coverage (which is of course based on the product chosen and Tabarru/contribution paid). The claims process and payout duration are also handled similarly.
Essentially, there are takaful variants for every conventional insurance product in the market – which ensures there are no gaps in coverage for those who prefer takaful plans. From term life, whole life, medical, and critical illness, to general takaful plans including motor vehicle and home protection, most takaful providers will offer these plans at similar rates to conventional insurance companies.
In addition, one unique offering by takaful providers is the family takaful plan. As mentioned earlier in the article, family takaful is basically a bundle of several takaful certificates to provide coverage to the entire family. It is designed for the breadwinners of the family and makes it more convenient for them to oversee and manage the household’s takaful coverage needs. Moreover, family takaful plans are also more affordable compared to signing up individual plans for each family member.
Certain takaful certificates also offer rebates at the end of the term or upon renewal to the certificate owner. Surpluses in the collective fund at the end of the term will be distributed to the participants of the pool on an equal basis.
The second benefit that one receives is non-monetary and is more spiritual. Through the act of donation, participants of the funds will receive blessings and rewards from God.
Takaful plans are not exclusive to Muslims and therefore, a practical and viable option to explore for everyone. If you are interested in getting takaful coverage, FWD Takaful offers a wide range of plans to cover your needs.
FWD Takaful provides an online distribution channel that is convenient with affordable and simple products for consumer’s participation. The online distribution channel carries a range of products which includes term life, hospital cash income, critical illness coverage as well as a plan for children with learning disability. The plans are made for the consumption of consumers from all walks of life, from individuals, families as well as for the underserved.
RinggitPlus has collaborated with FWD Takaful to provide exclusive benefits for all RinggitPlus Blog readers! From 15 August to 31 December 2021, you can enjoy one of the following benefits:
Simply enter the promo code at checkout to enjoy the discount. This offer is applicable to the following FWD Takaful plans:
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