Takaful – a tool for financial compensation in hard times

Adnan Malik

Takaful is a Shariah compliant alternative of conventional insurance. In Pakistan, more than 15 companies are offering takaful products. These companies provide financial assistance and compensation if any covered loss occurs. That loss can be the death of a father supporting his family, a factory on fire, theft of vehicle and cash snatched on gun point. Let me share few real stories showing how insurance and takaful companies helped their clients when they were in financial trouble. I am a direct witness of these stories but will not disclose the identity of the companies and clients.

In 2005, when I was serving in death claim department of a reputable insurance company, a widow sent us death claim intimation of her husband who had passed away in an accident. He took an insurance policy almost three months before his death. Face value of the insurance policy was Rs1 million and total duration was 20 years. Company promised in the contract to pay Rs1 million if he dies due to illness or accident. He also purchased two additional contracts, including an accidental death benefit (ADB) requiring company to pay an additional sum of Rs1 million if death occurs due to an accident. 

The 2nd additional contract was an annuity of 20% of face value for Rs1 million for 20 years. Annuity is also called family income benefit (FIB) which pays equal amount of payment in installments for specific number of years. Company promised these payments in exchange of premium (price of insurance) payment by the client of around Rs45000 each year for 20 years. 

After three months of purchasing life insurance, client died in a road traffic accident. The widow reported the incident and claimed promised compensation. After documentation which took around a month, her claim of around Rs5.8 million was approved which included the following: Rs1 million against the basic life insurance agreement, Rs1 million against the ADB and Rs3.8 million against the annuity (Rs0.2 million per year for the remaining 19 years of the agreement), total was Rs5.8 million.

Now, Rs5.8 million in exchange of Rs45000 can only be paid by insurance or a takaful company. It cannot be paid by banks, leasing companies and mutual and pension funds. That’s why insurance is also a parachute which helps when none of other financial options work. Takaful companies are now offering similar services in a Shariah compliant way without violating the Islamic principles.

In another case, in 2018, a person covered his car for 12 months with a takaful company and paid a contribution (premium) of Rs25000. After a few months, the client met an accident with another car. The client was at fault. Both the cars were severely damaged but luckily no one was injured. Other car owner asked the client to repair his car as he was at fault. The client admitted his mistake and towed both the vehicles to workshop for repair. The repair cost on client’s car was around Rs80,000 while repair cost of other car came out to be Rs132000. So total cost was around Rs212,000. The takaful company agreed to pay Rs170,000 and therefore, the client had to pay only Rs42000 which was significant financial relief for him.

In 2001, I was working in maturity department of a life insurance company. This department pays money to the clients who survive during the duration of the life insurance company and don’t die in the period for which insurance is purchased. Every month, we used to inform the clients having insurance policies and their period was maturing in coming three months. We asked them to send some documents along with their bank account details. 

One of our clients was a school headmaster and he had purchased a life insurance policy with sum covered Rs0.1 million in year 1981 for 20 years. His annual premium was around Rs4000 which he was asked to pay annually for 20 years. Meanwhile, if he dies, company will pay his family Rs0.1 million and some profit. Luckily, he survived and didn’t die and insurance period of 20 years was completed. So, in 2001, we sent him a letter and conveyed him that around Rs0.4 million (sum covered Rs0.1 million and profit Rs0.3 million) is payable to him. We requested for some verified documents and bank details. 

One morning, I was checking the letters and documents submitted by our clients. I also found a letter from that school headmaster who was retired now. He wrote in the letter that marriage arrangements of his youngest daughter were in process but he was facing financial difficulties. Our letter gave him a good news and he thanked God to be lucky enough to have some savings through insurance which was solving one of his big financial problems. He mentioned that he spent most of his other savings and investments in building a house and on the marriage arrangements of his other children and was almost empty handed at that time. I processed his payment within a week and sent him the cheque.

It can be noted that insurance and takaful companies have compensated and assisted thousands of clients in similar ways. Islamic scholars don’t object the aim of insurance companies which is helping people when they are in financial trouble. But scholars object the mechanism of insurance which contains riba, uncertainty and gambling etc. which are totally prohibited in Islam. Therefore, the system of takaful was developed which provides almost all the coverages like insurance companies. But takaful policies have no element of riba, uncertainty and gambling and therefore, majority of Islamic scholars accept it as Shariah compliant alternative of insurance. 

In Pakistan, takaful companies started their operations in 2006 and presently more than 15 companies are providing takaful products which cover life, motor, buildings, physical stock, machinery, health and cash etc. People can take their required coverage from takaful companies and can make arrangements when they, God forbid, get into a financial trouble. 

The writer has worked for 15 years in insurance and takaful companies. Presently, he is working as a lecturer at the Centre for Excellence in Islamic Finance (CEIF), Institute of Management Sciences (IMSciences), Peshawar. He can be contacted at: adnan.malik@imsciences.edu.pk. 

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