Life Insurance Halal or Haram?
The issue of whether life insurance Halal or Haram in Islam is an important one and one where there has unfortunately been no shortage of misinformation published on the topic. In this article, I will clarify the different types of life insurance and give you my opinion on both the halaness and financial wisdom of taking out life insurance.
The two main categories of life insurance are Term Life Insurance, which provides coverage for a fixed term (period of time) and Permanent Life Insurance which covers the insured’s entire life so long as they continue to make payments their whole life (which few do) and involves a cash component.
Permanent Life Insurance:
There are a number of different products that fall in the category of permanent life insurance perhaps the most well known of which is Whole Life Insurance. Appropriately named as such because for your whole life you’ll regret buying this type of insurance.
With Permanent Life Insurance part of your monthly payment goes towards building a cash component and the other part is meant to cover the insurance premium.
Because of this added cash component, Permanent Life Insurance is typically 10 times as expensive as Term Life Insurance for the same amount of coverage. (1)
My advice is to avoid all types of Permanent Life Insurance like you avoid staring at the sun during a solar eclipse, for a number of reasons:
First, The cash components that are attached to these policies accrue interest which is haram.
Second, even if you were to find a Permanent Life Insurance policy where the cash component didn’t accrue interest in any way you should still avoid Permanent Life policies because when you die, after having paid ten times as much as you needed to in order to build up a cash value in your policy, your beneficiaries don’t get any of this cash value. They only get the death benefit but not the cash value of the policy.
The cash component goes to the insurance company when you die!
If you want to access the cash in your policy while you’re alive you have to cancel your policy at which point you’ll get charged an arm and a leg in fees and only get back a fraction of the cash value amount. Alternatively, get this, the insurance company will lend you against the cash component of your policy and you have to pay the insurance company interest on this loan which you shouldn’t have had to take out in the first place!
So I want you to avoid permanent life insurance like you avoid stabbing yourself in the neck with a rusty syringe because if you do get permanent life insurance at some point you may feel inclined to do just that.
Keep in mind insurance agents are often incentivized to sell you Permanent Life Insurance because they get fatter commissions from selling Permanent Life Insurance than they do from Term Life Insurance.
So if you find yourself in a situation where an insurance agent is trying to sell you Permanent Life Insurance I want you to first pray for them and then proceed to get them out of your face.
Term Life Insurance
Term life insurance covers a fixed period of time, such as 20 years.
The way Term Life Insurance works is that in exchange for monthly payments, the insurance company makes a legally-binding promise to provide a predetermined amount of money, known as a “death benefit” to the beneficiaries of the insured upon the insured’s death.
Consider the following case: Let’s say you’re a 30 year old male with little to no savings and are the sole breadwinner in your family. You have a wife and 2 kids. In case of your sudden death, you estimate that your family will need $500,000 in order to maintain their current standard of living until either your wife can find a decent job and/or your kids are old enough to work and take care of themselves. So you take out a Term Life Insurance policy for the next 20 years which pays out $500,000 to your family in case you die during this time.
In order for your life insurance policy to remain active for the next 20 years you have to make monthly payments to the insurance company commonly known as “premiums”.
Life Insurance Halal or Haram?
The key to ruling on the matter of whether life insurance is halal or not is understanding what type of contract life insurance is. Is it a sale? A loan? An exchange of money for money? Is it an investment? What is it exactly?
To answer this question, we should ask: What motivates the insured to make monthly payments to the insurance company?
What is the insured getting out of their monthly premium payments? Is it true that they only get something in case they die?
All else being equal, whose family is in a more secure financial position, the family of the person who has life insurance or the family of the person who doesn’t have life insurance?
An honest appraisal of the financial security for both families will clearly favour the family of the insured person.
Even while the insured is still alive.
So going back to our question, what motivates the insured to make monthly payments to the insurance company? Clearly, the motivation is obtaining an added degree of financial security for their beneficiaries.
Again, the existence of this security is not contingent on whether or not the insured dies. This security is present even during the insured person’s life.
So when the insured makes monthly payments, the insurance company receives money and in return the insured buys a legally-binding promise from the insurance company that if the insured dies during a certain period of time, their beneficiaries will receive a predetermined amount of money.
So life insurance is a sale. The insurance company is selling their legally binding promise to the insured.
The security the insured gains, as a result, isn’t subjective, it’s objective.
One can objectively say that the beneficiaries of the insured are in a more secure financial position than the beneficiaries of the uninsured, all else being equal.
Risk is as real as real gets
What causes many to fail to recognise insurance as a sale is that the insurance company’s promise to pay is not a tangible thing. This causes some commentators to only be able to recognise the money flow. That is, they can only see one side receiving money, the insurance company, and the other side, the insured, sometimes receiving money in return but usually receiving nothing at all.
This couldn’t be further from the truth as is evidenced by the fact that when one compares the financial security of the beneficiaries of the insured with the uninsured one clearly prefers the security of the insured.
This is because the risk of unexpected death, although not tangible, is very real.
The translation of what Allah SWT says in Surat Luqman, verse 34 is:
Indeed, Allah [alone] has knowledge of the Hour [judgement day], sends down the rain and knows what is in the wombs. And no soul knows what it will earn tomorrow, and no soul knows in what land it will die. Indeed, Allah is All Knowing, Expert.Quran, Surat Luqman, verse 34
Since the risk of a family losing its primary breadwinner due to their unexpected death is real, is it not a smart thing to protect from this particular risk? Of course it is.
The Wisdom of Life Insurance
Most fair-minded people agree that protecting your family from the real financial risks that could face them in the event they lose a vital source of sustainability is the responsible thing to do.
Even if you don’t die, were your payments towards the life insurance company a waste?
No, during the time that you were covered, your beneficiaries were protected from acute financial adversity in the event of your passing.
If I buy a car seat for my child and it never comes in handy because I never get in an accident, should I feel bad about my purchase? Should I wish I never protected my child? If you’re like most people, the answer is clearly no.
Do I have a right to ask the car seat seller to return my money? No, I paid for a product and that’s what I got. If I’m thinking correctly, I should feel gratitude that the car seat was never needed.
Similarly, when you are paying for life insurance you are paying for a legally binding promise. You got this legally binding promise, regardless of whether or not you ended up needing it. If you’re thinking correctly about the matter, you should feel gratitude that the life insurance you purchased was never needed.
In a paper arguing for the prohibition of life insurance, the author literally says:
“If the person dies within the term [of the life insurance], he “wins,” although he is now dead.”
This gave me a rather good laugh I must admit. I doubt most people would agree with the author’s sentiment.
Checking for Riba, Maisir, and Gharar.
Now that we’ve identified what insurance is, let’s go through the three main corruptors of business contracts in Islam to see if they are present in life insurance:
Is it Riba?
In order for Riba to possibly be present there needs to be a loan of some sort, explicit or disguised (sometimes loans are disguised as money-money exchanges).
When the insured makes their premium payments they are not lending the insurance company money (if they don’t receive their premiums back the insurance company is not in default) nor is the insurance company lending money to the insured’s beneficiaries in the event a death benefit is paid out to them. So there is no loan of any kind here.
Is it a loan disguised as a money-money exchange? With a money-money exchange, if either party doesn’t receive some amount of money at some point than the other party is definitely in default.
This is not the case with life insurance. It’s possible for the insured to never receive any money from the insurance company without the insurance company ever being in default.
Therefore, in the case of Life Insurance, Riba is simply not a viable suspect.
Is it Maisir (gambling)?
The first prerequisite for maisir to be in play is that the activity has to create no needed value. This is clearly not the case with life insurance since the beneficiaries of the insured have greater financial protection than they otherwise would, so value is being created and therefore it can’t be said that insurance is a form of maisir.
Is it Gharar?
In the context of Islamic finance, Gharar refers to unnecessary ambiguity, especially as it relates to the object of sale.
Is there unnecessary ambiguity related to the object of sale in life insurance?
Again no, since the legally-binding promise that the insured receives is quite real and defined in detail.
Of course, life insurance contracts can have gharar in them if the terms of the life insurance policy are not spelled out clearly but this can be said of any contract imaginable and is not a reflection on the product itself, rather, the way the contract is written.
So if you’re selling Term Life Insurance you want to make sure that your contracts are clear and that the insured understands exactly when their policy will pay their beneficiaries and when it won’t and exactly how much their beneficiaries will receive in case of their death.
What about the insurance company’s investments?
What about the argument that insurance companies use the money that they collect from insurance policies to invest in interest-bearing products such as bonds?
First off, you need to understand that when you paid for your insurance you paid for the legally-binding promise of the insurance company and upon receiving this promise the money you paid to the insurance company for this promise is no longer yours.
You have no claim to that money nor do you have any right to benefit from it. The claim and the right to benefit from this money belong to the insurance company.
Similarly, if you buy an iPhone from Apple, once you receive your phone, you have no right to the money you used to purchase your phone. It’s Apple’s money now.
If you hold yourself accountable for where Apple invests the proceeds from its phone sales then it makes sense for you to do the same when you buy insurance.
By the way, Apple invests its cash reserves in billions of dollars worth of interest-bearing products. (2)
However, if you don’t hold yourself accountable for what Apple does with the proceeds from its phone sales, and most people don’t, then I don’t think you can make a stronger argument for why you should be held accountable for where the insurance company invests its own money.
Obviously, if you have the choice between an insurance company that you know only invests in shariah-compliant investments and one that doesn’t, with all else being equal, you should go with the one that does.
Just like if you had the choice between two phone companies, with identical phones, but one invests its reserves in shariah-compliant investments while the other doesn’t you should go with the one that does.
How responsible we are for what companies or individuals for that matter do with our money after we’ve made a purchase from them is a tough question and one that I cannot answer for you. Luckily, this is an entirely separate question from the one I set out to answer in this article which is whether or not life insurance is halal or haram.
The Incentives of Life Insurance
Many make the argument that life insurance may incentivize the beneficiaries to murder the policyholder. While this may be true, you can say the same thing about inheritance.
We know that inheritance isn’t haram so using this argument to prove that life insurance should be haram doesn’t suffice.
Life Insurance and Trusting Allah (SWT)
As for the argument that Allah SWT provides and that taking insurance is somehow equivalent to not trusting in Allah, you could say the same thing about pretty much any precautions a person takes in any context.
Wearing a seatbelt becomes not trusting in Allah as does saving money as does getting your children vaccinated.
This logic is not only erroneous but it is, in fact, the antithesis of everything taught in the Quran and Sunnah.
The Prophet (peace and blessings of Allah be upon him) said:
“It is better for you to leave your heirs well-off than to have them dependent, begging from people.”Bukhari 2742 , Muslim 1628
Taking out a term life insurance policy is a way to comply with the prophet (PBUH) instructions for us to strive to leave our heirs well-off and not leave them dependent relying on handouts.
Allah (SWT) indeed does provide and one of the ways he can provide is through life insurance.
I find absolutely no merit to arguments that claim that life insurance is prohibited in Islam.
Stay away from Permanent Life Insurance like you stay away from a rabid raccoon. It’s typically 10 times the cost of Term Life Insurance for the same payout on death.
Term life insurance is a sensible product for people who have dependents that rely on them and who don’t yet have enough savings to leave behind for them. I encourage readers who are in this situation to consider taking out a Term Life Insurance policy.