Reasons for Prohibiting Life Insurance
Life insurance involves the periodic payment of a specified amount of money, in exchange for a predetermined sum to be paid by the insurance company to the policyholder or a designated beneficiary, upon the policyholder’s death, reaching a certain age, or under other specified conditions. It is considered a type of commercial insurance that is prohibited in Islamic law due to its inherent uncertainty (gharar), as well as elements of usury (riba) and gambling (maysir). This means that life insurance contracts are deemed invalid, as they involve the unjust appropriation of people’s wealth without legitimate justification or equivalent return. Additionally, life insurance can entail usurious practices; while the policyholder pays a certain premium, they receive a greater amount in return. Moreover, the funds are often invested in prohibited activities according to Islamic law, yielding interest if the designated amount is not paid on time.
The Ruling on Cooperative Insurance
Cooperative insurance is permissible under Islamic law. This type of insurance is built on principles of mutual assistance and voluntary contribution among individuals. In contrast, commercial insurance is deemed haram (forbidden). Cooperative insurance involves a group of individuals coming together to mitigate risks through contributions based on goodwill, governed by specific contracts and obligations. Participants may agree to share losses, and the pooled contributions and any returns generated are managed by the cooperative fund itself, rather than being owned by an insurance company as in commercial insurance. Any surplus funds are allocated to benefit the community, and upon the conclusion of the cooperative insurance scheme, any remaining amounts are directed towards charitable purposes and good deeds.
The Ruling on Commercial Insurance
Commercial insurance is prohibited as it is classified among contracts considered gambling, which are unanimously rejected in Islamic jurisprudence. Participants pay a premium with the expectation of receiving a larger or smaller payout in return. It is important to note that the mere existence of insurance companies does not alter the forbidden nature of commercial insurance to permissible status. Instead, it is advisable to rely on the lawful alternative of cooperative insurance.