Risk is an inherent feature in our lives: car accidents, illnesses, fires etc. Some of us have the financial means to bear these risks alone while others do not. Insurance provides financial protection for those who do not want to carry life’s risks alone.
Imagine you are walking around with a sack of rocks on your shoulders, the rocks weigh heavily on you and you’d prefer not to have to carry them around. You encounter someone who is much stronger than you and has a greater willingness to carry rocks. You arrange with this person to carry some of your rocks in return for a fee you agree to pay them. Such is insurance. You are offloading part of the weight of your risk to another party who is more willing to carry.
Typically, insurance works as follows: the insured pays an “insurance premium” periodically, usually monthly, and in return the insurance company is obligated, if a specific event occurs such as a car accident or death, to cover an agreed upon amount of the financial burden that has befallen the insured.
Many Muslim scholars have deemed conventional insurance contracts to be prohibited in Islam. I will attempt to address the objections commonly cited by these scholars below:
Objections to Insurance
1- There is a high degree of ambiguity regarding the outcome of the sale of an insurance policy. The insured and insurer may or may not benefit from the insurance contract.
Response: While it is true that the monetary benefit for the insured may never be realized, there is non-monetary benefit that is realized immediately through the insured’s acquisition of protection from the threat they became insured against. Much like if you hired a security guard, the benefit you get from your hire, and the money that is owed to the security guard, need not be contingent on that security guard actually stopping a criminal. Rather their benefit is realized the moment they stand guard through the feeling of protection they cause you to have. A security guard may stand guard for years and never thwart a crime, alternatively they may stop a robbery and save their employer thousands of dollars on their first day. It doesn’t matter. The security guard is owed their wage and their employer is owed protection the moment their agreement starts. Once one understands that the object of sale and purchase in insurance is protection, not an amount of money, they are better able to assess its Shariah compliance.
2- The contract contains excessive risk and can be considered gambling.
Response: Isn’t the opposite true? Isn’t it more of a gamble not to have insurance against very real risks such as medical expenditures and car accidents? Ask yourself the following question: Is it more likely for someone to experience financial ruin because they had insurance or because they didn’t have insurance? Gambling is prohibited in Islam because it’s meant to provide entertainment but frequently causes financial hardship and ruin for players. Is this the case with insurance? First off, Insurance is not meant for entertainment. No one buys insurance because they want to have a good time. People choose to buy insurance because they have a need for financial protection from some of the real risks present in their lives. Second, when was the last time you heard of someone experiencing financial hardship or ruin because they were addicted to buying insurance? Quite the opposite, many people experience financial ruin because they didn’t have insurance when they needed it. Perhaps many of the readers know someone close to them who has gone through such hardship. Insurance is certainly not a form of gambling, not having insurance may be.
3- It involves interest (Riba) because the money paid out by the insurer may exceed what the insured paid in premiums.
Response: I wasn’t sure if I should respond to this one since it is so misinformed and reflects a serious misunderstanding of what interest (Riba) is. Unfortunately, I heard this argument enough times that I felt obligated to respond. Let’s start with a definition of interest. Interest arises with a contractual obligation that a lender’s money return to them with increase. This increase is called interest (Riba) and is what is prohibited in Islam. In insurance we neither have a loan nor do we have a contractual obligation on any party to return more than what they received. There is a possibility, just like with all investments, that a party will receive more money than they paid. Similarly, there is a possibility that a security guard will save more money for their employer than what he/she is paid to stand guard. This possibility, because it is not a contractual obligation, is what makes it an investment and not an interest-bearing loan. Interest has nothing to do with anything here. Perhaps the source of confusion among those who claim that insurance is a form of interest stems from the fact that an insurance contract is understood as a transaction involving only money. In other words the only elements in the contract are the money the insured is paying and the money the insurer is promising to pay if a certain event occurs. As we mentioned in our response to the first objection of ambiguity, Insurance is not a money-for-money exchange but rather it’s a protection-for-money exchange. Again, I will refer you to 3 ways to identify Riba.
4- Insurance pits the well-being of the insured and insurer against one another.
Response: This argument assumes that people’s desires are dictated solely by money. Just because I have medical insurance doesn’t mean I want to become ill. And you know who else wishes me health? the insurance company. The same holds true for car insurance. Just because I have car insurance doesn’t mean I want to get in an accident. One might say that life insurance can tempt the beneficiaries to wish ill on the insured. But you could say the same about inheritance in general. In the majority of cases, even when talking about life insurance, the insured, insurer and beneficiaries are hoping for the same thing: the well-being of the insured.
5- Insurance companies invest their money in interest-bearing products and pay their customers from the proceeds of such investments.
Response: The argument here is not against insurance but rather against interest-bearing products. Therefore it needs to be articulated as such. Traditional insurance does not require the involvement of interest-bearing products. It is perfectly feasible for an insurance company to operate without investing its money in interest-bearing products. Therefore, the choice of a particular company to invest in interest-bearing products is not an argument against insurance in general but rather an argument against that particular company’s insurance. If I buy a washer and dryer from GE and later find out that GE has a very large lending business, this does not mean that washers and dryers are prohibited in Islam. It is simply an argument against buying GE washers and dryers. This is because building washers and dryers does not require the manufacturer to be in the business of lending just as providing insurance does not require the insurer to invest in interest-bearing products.
In conclusion, I find that “traditional insurance”:
- Is not ambiguous, it represents a very clear transfer of risk from one party to another. Whether or not the risk materializes is irrelevant to the fact that the risk was actually transferred.
- Is not gambling because it produces real value for people and does not cause financial ruin. Quite the opposite, the absence of insurance may cause financial ruin.
- Is not interest (Riba), because there is no contractual guarantee of monetary gain for either party.
- Generally harmonizes the well-being of the insured with insurer.
- Does not require the involvement of interest-bearing products.
Based on this I find that insurance is permissible in Islam and if you’re convinced with what I’ve said I encourage you to get insured against the major risks in your life especially health, automobile and life insurance. Further, I believe purchasing insurance is consistent with the prophet Muhammad’s (peace be upon him) direction to “Think things through and depend on Allah”. Frankly, a more challenging question than “Is insurance permissible in Islam?” would be “Is not having insurance permissible in Islam?”
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