When it comes to protecting yourself and your assets, insurance is a vital component. But with so many different types of insurance out there, it can be difficult to know which one is right for you. In this article, we’ll take a closer look at the key differences between Takaful and conventional insurance, so you can make an informed decision about which one to choose.
What is Conventional Insurance?
Conventional insurance is the traditional form of insurance that most people are familiar with. It operates on the principle of risk transfer, where the insurer assumes the risk of loss or damage in exchange for a premium. Takaful, on the other hand, is a form of Islamic insurance that is based on the principle of mutual cooperation and shared responsibility
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The main principles of takaful
- Takaful is based on the principles of mutual cooperation, solidarity and mutual
guarantee, in which members contribute funds to a pool to help protect each other against financial losses, such as death, disability or illness. - Participants in a takaful scheme contribute money to a pool of funds to insure each other against losses, similar to how insurance works.
- Takaful does not involve any element of gambling or speculation, as it does not involve any type of investment or venture associated with risk.
- Funds collected from members are managed in a separate account and invested
in Shariah-compliant investments. - Participants in a takaful scheme are not only guaranteed a refund of their
contribution in the event of a claim, but also receive a share in any profits generate
from the investments. - Takaful is a cooperative system, which is designed to ensure that all members are treated fairly and equally.
- The operator is subject to the principles of justice and fairness, which means that it must assess each claim objectively, without discrimination.
- Takaful also promotes social responsibility, as it encourages members to contribute to the well-being of their community by helping to provide financial protection to those who are in need
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Key Differences between Takaful and Conventional Insurance
One of the main differences between Takaful and conventional insurance is the way in which risks are managed. With conventional insurance, the insurer bears the risk and is responsible for paying out claims. With Takaful, however, the risk is shared among all participants in the Takaful scheme. This means that if one participant makes a claim, the cost is spread out among all the other participants.
Another key difference is the way in which premiums are collected and used. With conventional insurance, premiums are used to cover the costs of claims and to make a profit for the insurer. With Takaful, however, premiums are collected in a pool and used to cover claims and other expenses. Any surplus is then distributed among the participants.
Additionally, Takaful also operates under the principles of Islamic law and prohibits certain types of coverage, such as gambling or alcohol-related incidents. Conventional insurance, on the other hand, doesn’t have any religious restrictions on coverage.
What does takaful cover?
Some examples of common types of coverage offered by Takaful include:
- Health insurance: Takaful health insurance covers a wide range of medical expenses related to illnesses and injuries, including hospitalization, surgery, and prescription drugs. Policyholders can choose from various types of plans, such as individual or family coverage, and can opt for additional benefits like maternity coverage.
- Life insurance: Takaful life insurance provides financial protection for the policyholder’s family in the event of their death. This can include coverage for end-of-life expenses, such as funeral costs, as well as a lump sum payment that can be used to provide for the policyholder’s loved ones. Takaful life insurance also includes savings and investment elements, where a portion of the premiums paid is invested with the aim of providing returns to the policyholder.
- Motor insurance: Takaful motor insurance covers damages to vehicles, as well as liability for any injuries or deaths caused by the policyholder’s vehicle. This can include coverage for accidents, theft, and natural disasters. Policyholders can choose from a range of coverage options, such as third- party only, third-party fire and theft, and comprehensive coverage.
- Property insurance: Takaful property insurance covers damages to the policyholder’s property, such as their home or business, due to events like fire, theft, or natural disasters. This can include coverage for the cost of repairs or rebuilding, as well as replacement of personal property. Policyholders can choose from a range of coverage options to suit their specific needs and can opt for additional benefits like flood or earthquake coverage.
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What is prohibited for takaful insurance?
Takaful insurance operates under the principles of Islamic law and prohibits certain types of coverage and activities that are considered haram (forbidden) in Islam. Some examples of what is prohibited in Takaful insurance include:
- Gambling and speculation: Takaful insurance prohibits coverage for any losses or damages resulting from gambling or speculative activities. This means that Takaful insurance companies cannot provide coverage for casinos, horse racing, or other forms of gambling.
- Alcohol-related incidents: Takaful insurance also prohibits coverage for any losses or damages resulting from the consumption of alcohol. This means that Takaful insurance companies cannot provide coverage for accidents or injuries that occur while under the influence of alcohol.
- Interest-based transactions: Takaful insurance prohibits interest-based transactions and investments. This means that Takaful insurance companies are not allowed to invest in industries or activities that involve interest-based transactions, such as banks or finance companies.
- Haram Industries: Takaful insurance companies are prohibited from investing in industries that are considered haram (forbidden) in Islam, such as tobacco, weapons, or gambling.
Why is takaful is better than conventional insurance?
It is structured to be free from speculation, uncertainly, and excessive risk. This is in contrast to conventional insurance, which is based on the principle of indemnity and operates with the principle of risk transfer.
Takaful offers a much more ethical approach to insurance. Its core principles are based on mutual cooperation, solidarity, and mutual responsibility.
Takaful pools contributions from policyholders, which are used to cover the losses of any policyholder who is affected by a covered event. This allows for greater transparency and fairness, as policyholders know that their contributions are only used to cover their own losses.
In addition, Takaful is based on the concept of helping each other and the community at large, which further enhances its ethical appeal.
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What benefits does conventional insurance have over takaful?
One of the main advantages of conventional insurance is that it is more widely accepted and understood by consumers. This means that they are more likely to take out conventional insurance policies than takaful policies, making it easier and more convenient for them to purchase the right type of coverage.
In addition, conventional insurance also offers a wider range of options. For example, it provides a variety of coverage levels, deductibles, and other features that can be tailored to the individual’s needs. This provides greater flexibility than takaful, which typically offers only one type of coverage.
Furthermore, conventional insurance also typically has lower premiums, making it more affordable for the policyholder. Finally, conventional insurance policies also tend to offer better customer service and support, which can be invaluable in the event of a claim.
Summary
In summary, Takaful and conventional insurance are two very different types of insurance that operate on different principles and have different features. Takaful is based on the principle of mutual cooperation and shared responsibility, while conventional insurance is based on the principle of risk transfer. If you’re trying to decide which one is right for you, it’s important to consider your personal values and priorities.
