What will become of your family if you die or become disabled tomorrow?
A very scary thought indeed, but this thought crosses our minds every now and then. Risks are an inherent part of life; the possibility of having your car stolen, or getting involved in an accident, the chance of your house being destroyed by a fire and many other such risks are a part of our lives; especially in a country such as ours. Now, the question that arises is: should we just sit and worry about these risks or is there something we can actively do to mitigate the effects in case – God Forbid – they do occur?
What Options do we have for dealing with Risks in Life?
Insurance is the primary tool available to us to mitigate the effects of a calamity to our life and property. But unfortunately, there are certain components of conventional insurance that are against the Islamic teachings. So the next question which arises is: if I can’t use conventional insurance, is there an alternative compliant with the Islamic shariah? You’ll be glad to know that yes, there is! Takaful is an alternative to the traditional insurance.
What is Takaful?
The term Takaful is derived from Arabic word Kafala. Kafala means to take care of someone or to guarantee something. It is a system in which, mutual assistance (Ta’awun) and voluntary contribution (Tabarru) are the guiding principles. It is a type of insurance where the risk of loss is shared by the participants collectively when they contribute to a common pool of funds.
There are two primary Takaful models:
The Mudarbah Model
In the Mudarbah model, the Takaful operator shares the risk and has an equity partnership. The Mudarbah contract specifies the terms and conditions such as how the surplus funds will be distributed.
The Wakalah Model
In the Wakalah model, the participants appoint the operator as their Wakeel. The operator acts as the agent of the participants and charges a Wakalah fee for managing the fund. The fee is calculated based on the contribution of the participants, return on investments and the amount of the surplus funds.
In Pakistan, all Takaful plans and products have to be according to either the Mudarbah or Wakalah models, or a combination of both. Most of the Takaful companies in Pakistan use a Wakalah-Waqf model.
How Does Takaful Work?
Takaful uses solidarity and brotherhood as the driving force. The participants in Takaful pool their contributions in a mutual fund (Takaful fund) which is called Waqf and is used to compensate a participant in the event of a mishap (an event covered by the policy).
As in any Waqf, the ownership belongs to Allah (SWT) and not the participants of the fund or the operator. The payments made by the participants are not considered ‘premium’ as in traditional insurance. Instead, these payments are regarded as a charity contribution or donation. The Waqf then invests the money into Shariah compliant businesses. Similar to traditional insurance, the amount and extent of coverage depends on the requirement of the individual participants and may vary from person to person. After taking into account all of the costs and after paying for all the claims, the remaining funds belong to the participants and can be used by them.
The Takaful fund is managed by professional Takaful companies, which are considered as Wakeel. The operators charge a Wakala fee, which is paid from the fund.
Misunderstanding about Takaful and Tawwakul
A lot of people (even Muslims) mistakenly believe that Takaful is against the Islamic concept of Tawwakul, which basically means putting your trust entirely in Allah for all of your needs.
“…and whoever places his trust in Allah, Sufficient is He for him, for Allah will surely accomplish His Purpose: For verily, Allah has appointed for all things a due proportion.”
Many Muslims misconstrue this concept and think that Tawwakul means not making any effort to accomplish the tasks of our daily lives and just ‘relying’ on Allah . But this is not a correct interpretation of the concept. According to the Permanent Committee for Research and Verdicts in Saudi Arabia,
“Tawakkul in reality does not deny actually working and striving for provision, for Allah Almighty has decreed that we should work and it is from His ways that he gives people when they strive. In fact, Allah Almighty ordered us to both depend upon Him and to work, to take the necessary steps needed to achieve our goals…”