Insurance: Halal or Haram?

Insurance is an arrangement wherein the insurer provides protection for the insured in the form of a guarantee of compensation in case a certain adverse event occurs. Some of the most common events that are insured against include death, illness, injury and loss of property.
In return for this protection, the insured makes a recurring payment to the insurer (often referred to as “Premium Payments”).

Insurance and the Quran and Sunnah

From an Islamic perspective, Insurance is a good application of the Quran’s commandment in Sūrat al-māidah to:
“…cooperate in matters of righteousness and piety” [1]
For what is more righteous than the healthy taking care of the sick and the able taking care of the disabled and the families who have a breadwinner taking care of the families that lost theirs. These righteous acts happen when people participate in insurance.
The Prophet Mohammad (ﷺ) says:
“Whosoever reduces the burden of a worldly calamity on a believer, Allah will reduce the burden of a calamity from the Hereafter on them.” [2] 
Insurance is the embodiment of helping others in times of calamity. The payments you make to an insurance company, with which you are purchasing protection for yourself, are partially going to the insurance company as profit and the other part is going to cover the financial burden of some other insured person who has had a difficult event befall them.
So you’re reducing the burden of a worldly calamity on another person and adhering to the prophet’s encouragement to do just that.

Insurance in Islamic History

The prophet (ﷺ) also encouraged the use of insurance through his actions and decrees. 
In the first constitution of Madinah which was drafted by the Prophet Muhammad (ﷺ), there is an actual mandate for tribes to insure their members in case one of them needs to pay what is known as “Blood Money”.
Blood Money is money paid to the relative of a murder victim as a fine. This system was known as “Aqila” amongst ancient Arabs. It was a way for conflicts to be avoided and cycles of bloodshed to be ended by forcing the aggressor to pay a monetary penalty.
The prophet (ﷺ) was ensuring the fire of conflict between tribes was always being put out through making sure the funds to pay blood money were always available and he did this through a system of tribal insurance.
Later, as Muslim traders expanded to markets in the Indian subcontinent, and reached places as far as present-day Malaysia and Indonesia, they often experienced large losses when ships were lost at sea or raided by pirates.
To address these risks traders often agreed before they started their long journeys to an insurance-like arrangement wherein they would contribute to a fund that is used to compensate any member who suffered losses during the trip.
It is conceivable that without these insurance arrangements, early Muslims would not have found it economically viable to go on these long trading trips and Islam would never have spread to places as far as Malaysia and Indonesia.
So from the Quran, the actions and sayings of the prophet Muhammad (ﷺ) and the precedent set by Islamic history one can make a strong argument not only for the permissibility of insurance but its virtue as well.

Recent Objections to Insurance

Unfortunately, in very recent history some prominent voices have deemed insurance forbidden in Islam. Most notably in 1977, the Islamic Fiqh Council in its first session ruled to prohibit commercial insurance.
There was a dissenting view in the council which I’d like to recognize here which was that of sheikh Mustafa Al-Zarqa who found no credible objections to commercial insurance. You can read both the opinion of the council and the dissenting opinion of sheikh al-Zarqa in the links I’ve referenced below. [3]
The tragedy is that since the opinion of the Islamic Fiqh Council many Muslims have voluntarily denied themselves the benefits of insurance in order to adhere to what they were told their religion demands.
Now, of course, those who think insurance is prohibited in Islam have specific objections that they cite so I’d like to address these objections in a way that should leave no doubt for the reader. Let’s start with objection #1:

Objection # 1: Insurance involves Gharar

Insurance involves Gharar (deception or unnecessary ambiguity); This is because the benefit received from purchasing insurance is unknown at the time of sale i.e. whether or not the insured collects any money or receives any benefit from purchasing insurance is dependent on unknown future events. 
Response:
The mistake in this argument is in the understanding of what Gharar is; it is being implied that Gharar arises in transactions where the benefit is unknown. This is demonstrably false on account that it is very rare for anyone to know beforehand the exact benefit they are going to receive from something they’ve purchased. You can buy a pair of sunglasses and lose them before you ever wear them, you can pay to have your car equipped with airbags and never get in an accident, you can purchase a fire alarm for your house and no fires ever happen. So Gharar cannot be defined as arising in transactions wherein the benefit is unknown.
So what is Gharar? well let’s look at what the prophet (ﷺ) actually said about it.
The examples of Gharar the prophet (ﷺ) gave us are: the sale of fish in the sea, or birds in the sky, or an unborn calf in its mother’s womb. In these examples, it’s not the benefit of the sale that is unknown, but rather what is being sold. With fish in the sea, I don’t know how many fish there are, how much they weigh, what type of fish there are, or even if I’ll be able to catch any. The same is true with a calf in its mother’s womb; I don’t know what’s in the mother’s womb… it could be male, it could be female, it could be twins, the fetus may come out dead, etc.
So Gharar arises when the object of sale isn’t properly defined, not when the benefit of the sale is unknown.
In the case of insurance, it is true that the benefits from purchasing insurance are unknown (like almost anything else) in the sense that you don’t know how often you will need it (although one can argue that you gain peace of mind regardless, but let’s ignore this in order to give the objectors to insurance the strongest possible argument they can have). However, what you’ve purchased in the case of buying insurance is very precisely known, namely, a legally binding promise from the insurance company that it will cover a certain expense or pay out a certain amount in case a particular risk materializes. This promise is defined with the utmost amount of precision: You know how much the insurance company will payout, under what circumstances, and over what time period the promise to pay will remain active.
I suppose a source of confusion for those who claim that insurance involves Gharar is that they think an amount of money is being purchased by the insured and that this amount of money is unknown. However, if the purpose of getting insured was to receive an amount of money, people who had insurance would hope to use their insurance in order to collect that money. This is demonstrably not the case.
People who have medical insurance don’t hope to fall ill, people who have disability insurance don’t hope to become disabled, people who have accident insurance don’t hope they get in a car accident. People who have insurance hope they never need it! So they are certainly not purchasing money nor hoping to receive it rather they are purchasing a legally binding promise from the insurance company and in most cases hoping they never need it.
Once one understands that Gharar arises not when the benefit of sale is unknown but rather when the object of sale is unknown and that the object of sale in insurance is a legally binding promise and not an amount of money, it’s immediately apparent that insurance does not involve any Gharar.

Objection # 2: Insurance is Gambling

The contract can be considered gambling because it pays you money without requiring you to do any work and the amount you benefit is based on luck.
Response:
As we’ve mentioned, people don’t buy insurance to make money. They buy insurance in order to avoid financial hardship. Anyway, insurance companies only pay out an amount of money that is commensurate with the damages incurred and often the insured never even touches the money that is paid out by the insurance company; it goes directly to the medical care provider or to the auto mechanic or whoever provided the remedial service for the event that was insured against.
If you say insurance is like gambling because minimal effort is put into earning the money that is paid out by the insurance company, what’s your stance on inherited money? How much effort is put in by the heirs to earn the wealth they’ve inherited from the deceased? Is inheriting money forbidden in Islam because no effort was put into its acquisition?
If you say insurance is like gambling because the amount of benefit you receive is based on chance, the same can be said about a lot of things. Take a security guard for example. The amount of benefit you receive is based on whether or not you get robbed. Something you have zero control over. So is hiring a security guard forbidden in Islam?
Other than trying to get rich, people gamble because they find it entertaining. When was the last time you heard of anyone buying insurance because they wanted to have a good time?
If you think of gambling as an unnecessary assumption of risk that can cause financial loss, the logical question to ask is not whether having insurance is gambling but rather is not having insurance a form of gambling?
With all the unexpected expenses that we face in life, and how expensive things have become, and the fact that many people go bankrupt even with the support of insurance, one can make a strong argument that voluntarily choosing to not have insurance is a form of gambling.
We know that one of the reasons Islam prohibits gambling is because it often causes financial hardship for the players. When was the last time you heard of someone experiencing financial hardship or ruin because of insurance? isn’t it the other way around? don’t 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.
The fact is insurance is not gambling but Not having insurance may be.

Objection # 3: Insurance involves Riba

It involves interest (Riba) because the money paid out by the insurer may exceed what the insured paid in premiums.
Response:
First, let’s be absolutely clear, neither the money received by the insurer nor the money received by the insured is a loan. In neither case is there any obligation to pay back the money received. After all, the definition of a loan is an amount of money that you have to pay back.
Now, let’s talk about Riba. The type of Riba which is being referred to is commonly known as interest. Interest causes an amount of debt to increase with time. This increase is what is prohibited in Islam. In insurance, one can pay for a short period of time and receive a large amount and alternatively pay for a long period of time and receive no money in return. So clearly the amount of money received by the insured and the insurer is not based on the passing of time like interest is.
In other words, both elements of interest which are the existence of a debt and an increase in the amount of that debt with the passing of time are absent in insurance. So it definitely does not involve Riba.
I guess the source of confusion among those who claim insurance involves interest stems from the fact that an insurance contract is understood as a transaction involving only money. Put differently, for many commentators, the only identifiable elements in an insurance contract are the money the insured is paying and the money the insurer is promising to pay if a certain event occurs.
This is not true.
An insurance contract involves the exchange of two things: money and risk. The insured is selling their risk to the insurer and because risk has a negative value they are paying the insurer to buy it from them.
In other words, the insured is buying a legally binding promise from the insurer.
No loans and no contractual guarantees that money will grow with time means there is no Riba.
Next objection…

Objection # 4: Insurance companies profit from Riba

Insurance companies invest their money in interest-bearing products and pay their customers from the proceeds of such investments.
Response:
Where do people who repeat this argument think non-insurance companies keep their cash? They keep it in interest-bearing bank accounts. If you are going to make dealing with any company that uses interest-based products in their operations forbidden in Islam I don’t think you’re going to have many products left to choose from.
Take the technology company “Apple” for example. Did you know that in 2013 Apple held more than 30 billion dollars in interest-bearing loans? Despite this, no one argues that buying an Apple phone is forbidden in Islam. Or that buying a washer and dryer made by General Electric is forbidden since GE operates a huge lending business. So why are we making a specific exception for insurance and saying that it’s haram?
In order to be consistent, we must say that if an insurance company managing its cash using interest-bearing products makes purchasing insurance Haram, then purchasing anything from any company that uses interest-bearing products to manage their cash is Haram.
If the latter isn’t true, and I don’t think that many argue it is, then the former isn’t true either.

Conclusion

I find that commercial insurance:

• Uses cooperation and the law of large numbers to provide much needed financial protection for consumers which is encouraged in the Quran, the life and sayings of the prophet Muhammad (ﷺ) and the precedent set by early Muslims.
• The object of sale and purchase in insurance is a legally binding promise from the insurance company, which is well-defined at the time of the sale, so it does not involve Gharar.
• Insurance reduces people’s financial risk so it’s really the opposite of gambling.
• It’s not interest (Riba), because there is no loan nor is there a contractual guarantee of monetary gain for either party.
• It does not require the involvement of interest-based products and therefore shouldn’t be classified as such.  

Based on this I find that insurance is permissible in Islam, it’s halal, 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 if you can afford to do so.
Further, I believe that not purchasing insurance in some cases is inconsistent with the prophet Muhammad’s (ﷺ) direction to “Think things through before you claim to depend on Allah”.
If you turn on your car and you have no plan for what you’re going to do in case, God forbid, you get in an accident, I don’t think you can claim that you’ve thought things through.
Frankly, a more challenging question than: “Is insurance permissible in Islam?” is “Is not having insurance permissible in Islam?”
Last note, despite that I think insurance is Halal I’m not saying that how insurance is provided today is necessarily the most efficient system out there. I encourage people to think about how to make insurance more efficient.
You may be wondering what I think about Takaful, erroneously referred to as “Islamic insurance”, I encourage you to read here to find out.
Sources and References:
[1]  Quran, fifth Sura (Sūrat al-māidah ), Verse 2 from http://corpus.quran.com/translation.jsp?chapter=5&verse=2
[2] Narrated by Muslim in his book “Sahih Muslim”
[3] Islamic Fiqh Council Decision:
http://themwl.org/global/2012/05/06/resolutions-of-islamic-fiqh-council-first-session-1398h
Dissenting Opinion of Sheikh Mustapha Al-Zarqa:
http://en.themwl.org/content/dissent-dr-mustafa-al-zarqa