Islamic Inheritance Law (Faraid) Quiz

Property Insurance

• A financial tool to protect against potential loss
• Covers damages to physical assets
• Includes homes, personal belongings, and other structures

Premium and Compensation

• The insured pays a premium
• The insurer assumes risk
• The insurer agrees to compensate for covered losses

Purpose of Property Insurance

• Reduces financial risks related to property damage or loss
• Provides peace of mind for individuals and businesses
• Enables recovery from unexpected events (natural disasters, theft, or fire)

Importance of Property Insurance: Protection

• Safeguards against major financial losses
• Covers catastrophic losses from hazards like fire, floods, earthquakes, or theft
• Insurance extends to furniture, electronics, clothing, and personal items while traveling

Importance of Property Insurance: Liability Coverage

• Protects against legal responsibility for injuries or damages to others on your property
• Mandatory for mortgages
• Lenders require insurance to protect their investment

Importance of Property Insurance: Mental Health

• Allows homeowners to focus on recovery and not financial burdens

Homeowner's Insurance Coverages: Dwelling and Structures

• Protects the physical structure of the house
• Includes attached garage, decks, or fences

Homeowner's Insurance Coverages: Personal Property

• Covers belongings within the home
• Includes appliances, electronics, and clothing
• Some policies include off-premises protection for belongings while traveling

Homeowner's Insurance Coverages: Additional Living Expenses (ALE)

• Covers temporary living costs if the home is uninhabitable due to a covered event

Homeowner's Insurance Coverages: Personal Property Floater

• Provides extra coverage for high-value items like jewelry, artwork, or collectibles
• Liability protection protects against legal claims for bodily injury or property damage caused by the policyholder or their family

Specialized Property Insurance Coverages: Flood Insurance

• Flood insurance is not included in standard homeowner's policies
• Requires extra coverage for flood-prone areas
• This can be purchased through programs like the National Flood Insurance Program (NFIP)

Specialized Property Insurance Coverages: Earthquake Insurance

• Earthquake insurance is not included in standard policies
• It is available as an endorsement to the main policy
• Earthquake insurance is critical in regions like California which is critical due to seismic activity

Specialized Property Insurance Coverages: Anti-Concurrent Causation Clause

• Insurers can deny claims when multiple perils occur simultaneously
• Makes it very difficult to determine the primary cause of the damage

Risk Management

• Defines risk as the uncertainty of financial loss
• Includes natural disasters, theft, or liability for accidents

Property Risks: Damage

• Hazards include fire, wind, water, and smoke

Property Risks: Use

• Situations where the property becomes temporarily unusable

Property Risks: Theft

• Losses from robbery, burglary, or intentional destruction of property

Insurance Claim Settlement Methods: Actual Cash Value (ACV)

• ACV pays the current value of the damaged item
• Formula: Replacement Cost - Depreciation = Actual Cash Value

Insurance Claim Settlement Methods: Replacement Cost

• Pays the full cost to replace the damaged item with a new one, without depreciation

Factors Affecting Property Insurance Premiums

• Location of the property impacts insurance premiums (natural disasters, flood zones, hurricane regions)
• The higher the risks, the higher the premiums
• Proximity to fire stations and hydrants positively impact costs

Factors Affecting Premiums: Type and Age

• Brick homes are cheaper to insure than wooden homes due to fire resistance
• Older homes with outdated wiring or plumbing may cost more to insure

Factors Affecting Premiums: Coverage

• Higher coverage limits and comprehensive policies equal higher premiums
• Choosing replacement cost over ACV increases the premium

Factors Affecting Premiums: Deductible amounts

• A deductible is the amount you pay out-of-pocket before insurance coverage kicks in
• Higher deductibles lower your premium but increase your personal financial risk

Factors Affecting Premiums: Security Features and Risk Mitigation

• Security features and risk mitigation can result in premium discounts
• Installing security systems, smoke detectors, and fire extinguishers is a good way to achieve discounts

Reducing Property Insurance Costs

• Monthly premiums are reduced by opting for higher deductibles.
• However, this requires the policyholder to pay more in the event of a claim.
• Install safety and security features

Reducing Property Insurance Costs

• Bundling home and auto insurance under the same provider often results in discounts.
• Good credit history is often considered when determining premiums and shows financially responsible behavior.
• Ensure adequate coverage is not over-insured or under-insured.
• Remove coverage for items no longer owned.

Exclusions in Property Insurance Policies

• Generally, floods and earthquakes are not covered under standard homeowner policies.
• Separate coverage must be purchased for these scenarios
• Other exclusions include damage due to age, neglect, or maintenance issues (like rust or mold) are not covered

Exclusions in Property Insurance Policies: Pests and Actions

• Damage caused by termites, rodents, or insects is generally excluded.
• Any deliberate destruction of property by the policyholder is not covered.

Conclusion

• Property insurance is a critical financial tool for safeguarding assets and belongings
• Look to manage risk and keep costs down to find adequate protection

Mortgage Reducing Term Assurance (MRTA)

• Life insurance policy that protects the borrower's mortgage liability
• Sum assured reduces with the outstanding loan balance
• If the borrower experiences death or total permanent disability (TPD), the insurer pays the remaining mortgage
• MRTA offers lower premiums but less flexibility, as it's often tied directly to the mortgage and may not be transferable if refinancing occurs

Advantages

• Cheaper premiums because the coverage reduces over time.
• Ensures your mortgage is paid off if something happens to you.
• Some MRTA policies allow a lump-sum payment at the start.

Disadvantages

• As the loan decreases, there's no extra payout for your family.
• Tied to the specific mortgage; refinancing means buying new insurance.
• Pure protection without savings or investment benefits.

Mortgage Reducing Term Takaful (MRTT)

• MRTT is the Shariah-compliant version of MRTA.
• Works under takaful principles where participants pool funds to help each other.
• The sum assured reduces over time along with the loan balance.
• If the borrower passes away or suffers TPD, the outstanding loan is paid off.

MRTT Advantages

• Perfect for Muslims who want to avoid riba (interest) and gharar (uncertainty).
• More affordable due to the reduced sum assured.
• If the takaful fund has extra money, you might get a portion back.

MRTT Disadvantages

• Only covers the remaining loan
• Very little to no extra funds for your family
• Hard to transfer if you refinance or move to a new property
• No savings or investment element

Mortgage Level Term Assurance (MLTA)

• Offers a fixed sum assured for the entire mortgage term
• Coverage doesn't reduce even if the loan balance drops
• Payout can be more than what's needed to settle the loan

MLTA Advantages

• Your family gets extra money after paying off the mortgage.
• Retain your policy if you refinance or buy a new property
• Some policies include an investment or savings component.

MLTA Disadvantages

• More expensive
• Results in paying for more coverage than needed.
• Complex investment-linked policies

Mortgage Level Term Takaful (MLTT)

• Shariah-compliant version of MLTA
• This offers fixed coverage for the mortgage
• This follows Islamic financial principles

MLTT Advantages

• Ensures ethical financial practices for Muslim borrowers.
• Offers surplus funds to support your family beyond the mortgage.
• Might get a portion of the surplus from the takaful fund.

MLTT Disadvantages

• More costly due to constant coverage
• More difficult to understand than some policies
• May end up paying too much in coverage

Mortgages Conclusions

• Determine if mortgages or investment coverage is more important
• Consider cost, coverage flexibility and financial goals
• MRTA and MRTT are best if you want affordable, straightforward coverage just for the mortgage
• If you want extra financial security for your family you must use MLTA and MLTT

Wills

• This is a legal document that outlines how a person wishes to distribute their assets after death
• Ensures that property is transferred according to the deceased's wishes.
• A will transfer property
• Probate verifies the authenticity of the will

Types of Wills

• Simple, Traditional Marital Share, Exemption Trust, Stated Dollar Amount

Formats of Wills

• Holographic, Formal, Statutory

Benefits of a Will

• Provides customization and minimizes family disputes

Limitations of a Will

• Time-consuming and costly
• The will must not go against religious laws

Faraid

• Islamic law that governs how a deceased Muslim's estate is distributed among rightful heirs
• Based on fixed shares and must be followed by all Muslims

Key Principles of Faraid:

• Mandatory distribution
• Fixed Shares
• Heirs

Exclusions of Faraid

• Non-Muslim family members are not entitled to inherit
• Adopted children and illegitimate children do not inherit unless provided for by other means

Advantages of Faraid

• Equitable distribution
• Provides clarity and reduces family disputes over inheritance.

Limitations of Faraid

• Lacks flexibility as the shares are fixed
• Does not account for personal relationships

Hibah (Islamic Gift)

• This type of gift allows for property or asset distribution
• Designed to be used during a person's lifetime
• Circumvents Faraid, offering more flexibility

Key Features of Hibah

• Allows for distribution to anyone, including non-heirs

Benefits of Hibah:

• Provides flexibility and supports non-heirs
• Avoids rigid allocations and quick transfer

Conclusion

Wills

• Flexibly distributes your assets based on your personal decisions in accordance to the law
• Can be subject to probate and further delays

Faraid

• Provides structure to your assets
• Fair distribution to all heirs
• Islamic Law

Hibah

• Ability to distribute your assets to everyone, even non-heirs
• This is a more flexible model, with thorough documentation

Life Insurance

• A contract between an individual and an insurance company; the insurer agrees to pay a designated beneficiary a sum of money (death benefit) upon the insured person's death
• In exchange, the policyholder pays regular premiums.

Types of Life Insurance

• Term, whole, and universal

Why Life Insurance

• Financial protection, debt repayment, and business planning

Disadvantages of Life Insurance

• Costly relative to term life insurance
• Very difficult to understand and manage
• Can be unnecessary

Medical Insurance

• Covers the cost of health expenses
• Includes doctor visits, hospital stays, surgeries, medications, and preventive care.

Protection

• Grants protection from high medical costs
• Covers expensive medical treatments, surgeries, and hospitalizations.

Insurance Limitations

• Can be expensive and may increase over time
• It is essential for both financial reasons and to provide peace of mind

Critical Analysis

Life Insurance provides long-term financial security for dependents and acts as an essential tool in estate planning and debt management

• However, it can be costly and may offer limited returns compared to other investment vehicles
• You should maintain a balance with your peace of mind in mind

Gold Investment

• Purchasing gold or financial products linked to gold with the primary purpose of preserving wealth and acting as a hedge against inflation.

Key Points of Gold Investment

• Gold is a tangible asset that acts as a safe haven during economic uncertainty or market volatility
• Gold can protect against inflation since gold tends to retain purchasing power

Advantages of Gold Investment

• Including gold in an investment portfolio reduces overall risk
• Can prevent inflation that can affect an investor's wealth

Disadvantages of Gold Investment

• Physical gold does not generate interest or dividends
• Secure storage may incur additional costs
• Market and geopolitical events can greatly impact gold

Microfinancing Investment

• Providing small loans to individuals whose limited access prevent them from using traditional financial services
• Promotes financial inclusion and generates returns through interest payments on the loans.

Key Features of Microfinancing Investment

• Empowers low-income individuals by enabling them to start or expand small businesses.
• Can reduce poverty in many communities
• High repayment rates are generally the norm

Advantages of Microfinancing Investment

• Can help contribute to economic development
• Interest rates can be higher than those offered by traditional banks

Disadvantages of Microfinancing Investment

• Borrowers may default, especially in unstable regions
• Funds are often tied up until the loan is fully repaid
• Microfinancing investment operations run with the risk under varying different legal frameworks

Stock Investment

• Entails purchasing equity shares
• Generates returns through capital gains (when the stock price increases) and dividends (periodic profit distributions to shareholders).

Stock Investment Factors

• Shareholders may have voting rights and are entitled to dividends.
• Easy entrance and exit out the investing of stocks
• Stock prices fluctuate based on company performance

Advantages of Stock Investment

• Can yield substantial profits through price appreciation.
• Providing investors with flexibility.
• Distribute a portion of profits in the form of dividends.

Disadvantages of Stock Investment

• Subject to price volatility and potential losses.
• Requires research and understanding of market dynamics
• Leads to impulsive emotional decisions or regret

Bond Investment

• Bonds are fixed-income securities in which investors lend money to a government, corporation, or municipality
• In exchange for regular interest payments (coupons) and the return of principal at maturit

Bond Key Factors

• Bonds provide predictable income through periodic coupon payments
• Risk depends on the issuer's creditworthiness

Types of Bonds

• Government, corporate, high Yield, and green

Bond Investment Pros/Cons

• Stable income and safe government issued bonds make it generally safe
• Inversely bond investment typically offers lower returns compared to stocks
• You must consider credit risk with investing in corporate and high-yield bonds

Investment Options Factors

• Gold is an excellent vehicle for wealth preservation and protection, though does not generate passive income
• Microfinancing offers both financial returns and social impact, though its lower liquidity comes with a greater risk of default
• Diversified portfolios effectively balance risk and return while ensuing effective capital preservation

Test your knowledge of Faraid, the Islamic inheritance law, covering key principles, Shariah courts role, Hibah, and wills. Questions address legal processes, documentation, and distribution of assets.