What Is Islamic Takaful Insurance?

Written by Wellington Ayugi

On May 6, 2015, the Insurance Regulatory Authority (IRA) introduced Islamic takaful insurance into the list of insurance providers in the country. The IRA made provisions which allow conventional players entry into the Islamic finance sector through the introduction of takaful insurance products and services.

Ever since the country’s first fully-fledged takaful company was formed in 2011, their customer base has grown rapidly.

However, a majority of Kenyans are still not fully aware of what this type of insurance actually entails. In most instances, people still think Islamic insurance is meant only for Muslims, yet this is not the case.

For you to get a better understanding of takaful insurance we have defined and broken down the terms for you so that you get a better understanding of what it entails. This will enable you as a potential customer to make an informed decision on how this type of insurance can align with your future goals.

What is Takaful insurance?

Takaful insurance also known as Islamic insurance is an arrangement where the participants agree to contribute money into a common fund. This fund provides mutual financial benefits payable to participants or their dependents upon the occurrence of certain stipulated events.

It is founded on the principle of cooperation, and separation between the operations of shareholders and the fund. The ownership of the Islamic insurance fund is passed to the policyholders.

How Does Takaful Work?

The main idea behind the concept is for the participants to contribute money known as tabarru to a Takaful Fund. The sums of money collected from policyholders are considered as donations and make up the Takaful Fund from where all claims are reimbursed.

A person must take out a contract (known as aqad) to become one of the participants in the fund. The contracts must be free of the following conditions:

  • Gharar: These are unpredictable conditions that are beyond the scope of the company’s control.
  • Riba: This is the interest associated with investments made by the insurance company.
  • Maisir: This refers to a situation where a business is generally unstable and gambles on the result of its profit margins.

Maisir and Gharar are inter-related to a certain level, as they correspond to anything that leads to uncertainty and being unable to clearly define terms or conditions of its operations. At the end of each financial year, after expenses have been deducted, any cash surplus that remains will not be retained by the firm or its shareholders. Instead, it will be paid to the policyholders as cash dividends or distributions.

How Does Takaful Insurance Differ From Conventional Insurance

Takaful insurance differs from traditional insurance as the as the policyholders benefit from the proceeds from the Takaful Fund.

The investment assets of the fund are invested by the shareholders and managed by the firm on behalf of the policyholders. The shareholders will, in turn, get a portion of the profit generated by these investments.

What Type of Products are Provided by Takaful

Takaful insurance products are fairly similar to conventional insurance products. Takaful providers offer both Life and General insurance types of policies.

General insurance is referred to as General Takaful and comprises of categories such as Fire, Domestic, Medical, and Personal Accident. Life Insurance is known as Family Takaful and includes Endowment, Whole Life and Annuities among others.

Why You Should Get Takaful Insurance

The following are the reasons why you should get takaful insurance:

  1. It provides an easier mode of managing risk: Generally conventional insurance and Takaful have the same aim, which is to cope with and manage risk. However, the key differences in the initial contract make Takaful insurance more desirable compared to conventional insurance. Takaful uses the principle of risk-sharing through mutual assistance among members, whereas conventional insurance is risk transferred from the client to insurance company.
  2. Payment and settlement of claims are easier: With Takaful insurance, in the case of an insurance claim, the funds are deducted from the Takaful fund. Whereas, with conventional insurance the money to pay the claims originates from the insurer. Hence a Takaful member is assured of receiving a fair compensation from the mutual fund. Conventional insurance companies usually  have to factor operating costs and their bottom line into any claim.
  3. It allows for profit sharing: The profit from any investments in Islamic insurance is distributed equally among the fund members as stipulated in their agreement. In conventional insurance, all the profits go to the company and its shareholders.

It is important to note that

Takaful insurance products are not exclusively for people of the Muslim Faith. They are open to all Kenyans regardless of their religious and cultural inclinations.

Takaful insurance is a viable and practical insurance products and services option to explore if you are looking for a more socially conscious type of insurance policy.

It is highly recommended you research and learn more about the various Takaful products. You are likely to find that you may prefer it to the conventional type.

Insurance commitments are usually long term and depending on your needs, you can either choose a conventional policy or Takaful insurance, or a combination of both.

Are you currently using a conventional based insurance policy or a takaful one? Share with us what you think in the comments section below.

Learn More:

  1. Insurance Regulatory Authority: A Guide to Takaful
  2. Information on Takaful-Association of Kenya Insurers

About the author

Wellington Ayugi

Wellington Ayugi handles Business Development at Covered and has a passion for personal finance, microfinance, and developments in financial technology