For Malaysians, the idea of insurance can be perplexing and daunting, particularly regarding the distinctions between traditional life insurance and family takaful. Below, we shall examine the differences between the two. This could assist you in selecting the kind that best suits your requirements.

What is meant by family Takaful?

Takaful is an insurance scheme founded on Islamic precepts. The foundation of the Takaful concept is a community of people who jointly insure one another from harm or loss. Each participant satisfies their commitment by making a fixed gift (tabarru) into a fund. The fund’s manager is an outsider known as the Takaful operator.

The Takaful operator shall distribute the money per its participants in the case of loss or damage. Any excess is only distributed upon the fulfillment of the participant assistance commitment. According to this concept, takaful functions as a profit-sharing and protection agreement between the participants and the takaful operator.

Although derived from Islamic teachings, takaful is not a religious product; anybody can purchase it, even non-Muslims. Takaful and Islamic banking products are becoming more and more popular among non-Muslims.

What is a traditional life insurance policy?

The way traditional life insurance operates is that you pay a premium and receive a death benefit. This way, the insurance provider assumes the risks instead of the individual.

Family takaful vs. conventional life insurance

Differences

Firstly, takaful adheres to Sharia law. There are no gharar, maisir, or riba components in takaful. It was developed as a substitute for traditional insurance, mainly to avoid these forbidden characteristics.

• Gharar: This is pure chance, pure uncertainty, or pure risk. It is unclear what the insurance policyholder is “buying” or paying for and if there is no damage and the policyholder receives nothing. This is Gharar.
• Maisir: This is chance-based gaming or gambling. Maisir is present because the payment of the insured amount is dependent solely on chance.
• Riba: In conventional finance, we call this interest. When money is put in assets that bear interest, it becomes relevant.

Secondly, in contrast to traditional insurance, participants in takaful maintain a share of the fund. The members’ contributions are then placed into “halal”  or Sharia-compliant funds to generate investment income. If there is excess money in the fund, it is distributed to the participants and occasionally to the takaful operator. This results in a “win-win” scenario for everyone involved.

Thirdly, ordinary insurance transfers the risk from the policyholder to the insurance company. On the other hand, shared risk is the foundation of takaful. Every participant donates to a takaful fund, from which they will receive the total amount of their claim should they lose.

Similarities

Conventional insurance and takaful insurance both offer protection against unanticipated events. Contributions from participants launch the coverage. The insured must have a rightful financial interest in the risk for both policies. This implies the participant must experience a monetary loss when the insured event happens.

The final take

Islamic or takaful plans are preferable to conventional insurance. Whereas traditional insurance uses your money to cover future claims, takaful allows you to grow your money over time.