Takaful vs Insurance: Key Differences

Differences Between Takaful and Insurance

• Essence of Intention: Takaful aims for spiritual and legal relationships, while insurance focuses solely on creating legal relationships.

• Formalities: Takaful often uses unilateral contracts (Tabarru' and Mudharabah/Wakalah) initially, which only need one party to contribute. Insurance uses bilateral contracts, where both parties are obligated to each other. Crucial to Takaful is the concept of donation (Tabarru') for funds transfer to avoid interest-based transactions and comply with Islamic principles. An insurance policy is a typical transactional agreement.

• Account Treatment: Takaful has specific accounts like Tabarru' (donation) and Participant accounts, differing from regular insurance accounts like Life Insurance Accounts.

• Subject Matter: Takaful requires Shariah compliance, meaning the subject matter or insured events must be permissible and justified under Islamic law. Insurance must satisfy Common Law requirements but otherwise has no restrictions on subject matter.

• Premium Payment: In Takaful, contributions are seen as donations (Tabarru'), not obligations like in traditional insurance. Insurance premiums are obligations from the insured to the insurer as per the contract.

• Forbidden Elements: Takaful strictly avoids elements forbidden in Islamic principles, such as interest (riba), speculation (maisir), and gambling. Insurance does not adhere to these principles.

• Profits: Takaful profits are sometimes shared between participants, fund managers and/or operator. Whereas Insurance profits or gains are entirely at the company's discretion.

• Contract: Takaful contracts often combine elements of donation (tabarru'), and agency or profit-sharing, while insurance contracts usually base obligations on sale and purchase agreements.

• Indemnity: The Takaful Fund provides indemnity, while insurance companies indemnity is drawn from their funds/assets.

• Operational Principles: Takaful adheres to Shariah principles, involving risk-sharing mechanisms amongst participants. Insurance is based on non-shariah principles and risk transfer from the insured to the insurer.

• Risk Treatment: Takaful centers around risk sharing amongst participants. Insurance transfers risk entirely from the insured to the insurer.

• Benefits: Takaful benefits are paid from funds collected under the principles of the takaful scheme, while insurance benefits are paid from the company's assets and funds legally owned by the insurer

• Taxation: Takaful benefits are often subject to Zakat, a mandatory form of charity in Islam. Whilst insurance benefits are taxed according to regular government tax laws.

• Profits/Bonus: Takaful profits are shared between the company and the participant, based on the agreement. Whilst insurance profits are shared between the company and insurance-purchasing parties.

• Responsibility of Policyholders/Participants: In Takaful, participants contribute to the scheme and mutually guarantee each other. Policyholders pay premiums for the insurance coverage.

• Liability: Takaful operators manage the funds and are liable for payments according to the terms. Insurance companies are liable for payments according to the policy and company's financial position

• Investment of Funds: Takaful is restricted to shariah compatible investments. Insurance investments are not necessarily subject to such limitations.

Explore the fundamental distinctions between Takaful and traditional insurance. This quiz delves into concepts like intention, formalities, account treatments, and the necessity of Shariah compliance in Takaful practices. Test your understanding of these crucial differences!