Is Life Insurance Haram or Halal? Guide for Canadians
Is life insurance haram?
Some believe that traditional life insurance can be considered haram, or not allowed, because it may involve 3 key forbidden factors:
- Gambling (maysir)
- Interest (riba)
- Uncertainty (gharar)
The concern is that you might be paying for something that you may never benefit from, or you could receive more money than you've contributed, both of which can be seen as uncertain and risky. In a study measuring the impact of Islamic beliefs on the intentions to buy life insurance, it was found that the higher an individual's Islamic beliefs, the more likely they were to view life insurance poorly.1
But there are Islamic insurance products that are widely accepted by the community, like Takaful insurance, cooperative insurance and term life insurance. Usually, insurance policies like a whole life insurance policy or universal life insurance policy are considered haram or not Shariah-compliant.
What do experts say about insurance and personal finance in relation to Islam?
Here are a few excerpts from publicly available sources breaking down the varied views on life insurance policy from the Muslim community.
"Life insurance does not contradict the requirements of Islam. This insurance is similar to the principles of compensation and shared responsibility among the community where all participants guarantee each other against unpredicted future financial risk." — financialislam.com
"The idea of Baitul Mal (House of Wealth/Exchequer of an Islamic State) is similar to that of an insurance company. It was where the revenues of the state were collected and where any citizen facing a financial crisis found sanctuary." — Salma Taman, Indiana University, Robert H. McKinney School of Law
"Conventional insurance relies on interest-based investments and is entirely rooted in un-Islamic, speculative investments. The insurance provider gambles on receiving more income from the premiums [...] than it has to pay out." — Islamic Relief Worldwide
"There are two kinds of life insurance. One is best understood as the standard protective insurance, while the other is best characterized as an investment vehicle. The former is permissible, while the latter is only permissible if the underlying investments are permissible." — Ibrahim Khan, Islamic Financial Guru
What does the Qu'ran say about life insurance?
The Qur'an doesn't speak about life insurance, but it does teach Muslims to be responsible and care for their families.
Life insurance can be a way to provide financial protection for your loved ones, which is in line with these teachings. But, it's important that the insurance you choose follows Islamic rules and principles to make sure it fits with the faith.
One type of life insurance that is designed to follow Islamic principles is called Takaful.
Takaful works by having people come together to help each other and share their risks. This way, Takaful follows values like cooperation and mutual support, which are in line with Islamic teachings. While the Qur'an doesn't directly talk about life insurance, it encourages Muslims to care for their families and Takaful can be a good option for that.
What is Sharia-compliant life insurance?
Sharia-compliant life insurance is a special kind of insurance that follows the rules and principles of Islam. It's like a safety net to protect you and your family, but it's designed to fit with Islamic beliefs and values.
One popular form of insurance that is compliant with Sharia laws is called Takaful (but cooperative life insurance and term life insurance may also be considered compliant).
What is Takaful?
Takaful is a unique kind of insurance that follows the principles of Islam, making it different from other types of insurance.
- Takaful policies cover health, life and other general insurance needs in the same way any other insurance product would.
- Takaful insurance works by having people come together to help each other and share their risks. Everyone contributes costs to a shared pool. This way, it doesn't involve things like gambling or making money from uncertainty.
- Takaful is different from other insurance because most insurance works by having an insurance company take on your risk in exchange for money (premiums paid).
- Takaful is based on people coming together to help each other and share their risks.
Takaful vs. traditional life insurance
How does Takaful compare with conventional/traditional life insurance? Why is one option more widely accepted by the Islamic community versus the other? Here's a head-to-head of the two types of life insurance coverage:
When it comes to Takaful versus traditional life insurance options, it's all about choosing what aligns best with your values and needs — a financial safety net for your family can be both Halal and practical. And there are options other than Takaful that are Sharia-compliant, which we'll get into below.
Is term life insurance halal?
Term life insurance may be considered halal by some Islamic financial experts. But what is a term life insurance policy, exactly? Term life insurance policy is some of the most affordable and straightforward life insurance that provides financial peace of mind for a set period.
Term life insurance is considered compliant with Sharia laws by some in the Muslim community because it is not an investment vehicle. Term policies are simply used as financial protection during the years in which a family needs it the most (like while paying off the house or before the kids grow up).
The bottom line is that term life insurance doesn't earn interest, so it may be better than whole life insurance or universal life insurance, which have investment and cash value components.
Next steps: Islamic life insurance coverage — Haram or Halal?
- Take a moment to reflect on what you've learned about life insurance in the context of Islamic principles. Remember, it's important to align your financial decisions with your beliefs.
- Reach out to an expert or simply other members of your Muslim community with an understanding of Islamic insurance.
- Think about your personal and family needs. What kind of coverage makes the most sense for you? And how much coverage do you need? Remember, the goal is to provide financial protection for your loved ones.
- Use all the information you've gathered to make an informed decision. Whether it's Takaful or another type of insurance, choose the option that best fits with your faith and meets your needs.
PolicyMe's life insurance calculator makes things easy, considering all the little details to determine how much life insurance you need to financially protect your family. Plus, it looks at your partner's earnings and your savings so you don't end up with more life insurance than necessary.
FAQ: Is life insurance haram in Canada?
Our sources:
1 Souiden, N., & Jabeur, Y. The impact of Islamic beliefs on consumers’ attitudes and purchase intentions of life insurance. International Journal of Bank Marketing. https://www.emerald.com/insight/publication/issn/0265-2323
Islamic Insurance (Takaful). Institute of Islamic Banking and Insurance. https://www.islamic-banking.com/explore/islamic-finance/islamic-insurance-takaful
Khan, I. Life Insurance: Is it haram or halal? Islamic Financial Guru. https://www.islamicfinanceguru.com/articles/personal-finance/is-life-insurance-haram-or-halal
Life insurance. Financial Islam. http://www.financialislam.com/life-insurance.html
Takaful (co-operative insurance). Islamic Relief Worldwide. https://islamic-relief.org/takaful-co-operative-insurance/
Taman, S. The Concept of Corporate Social Responsibility in Islamic Law. McKinney Law. https://mckinneylaw.iu.edu/iiclr/pdf/vol21p481.pdf
Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.
Our mission is to empower Canadians to make informed financial decisions. To achieve this, we have an expert editorial team that includes licensed insurance advisors and financial planners. We prioritize the best interests of Canadian families and won't endorse any product, company or financial strategy that we believe isn't suitable. Our educational guides are crafted by in-house experts, like licensed life insurance advisors. Before publication, we subject our research and advice to scrutiny and comprehensive revisions for accuracy and completeness.