Welcome to the complete guide to Takaful. By the time you have finished reading this, you can count yourself among the savviest group of financial consumers in Malaysia.
The Concept of Mutual Risk Sharing
Takaful is derived from an Arabic word which means a mutual guarantee, whereby a group of participants agree to mutually financially aid each other against a defined loss. Participants contribute regularly to a common pool of funds with the intention of jointly guaranteeing each other. When a participant enters a Takaful scheme, it does not only involve seeing protection for him, but also includes cooperating with other participants and contributing to help those in need.
Because it is a mutual risk-sharing contract between a group of community participants, therefore, unlike traditional insurance, the monies collected do not belong to the Takaful operator (who only manages it), but belongs to the participants of the scheme.
By virtue of this setup, any monies leftover (less operating costs and claims), are redistributed back to the participants as “profits” . This makes Takaful very appealing even to non-Muslims.
Other Islamic Concepts
Aside from the mutual contract among community participants, 3 other Islamic finance concepts also feature in Takaful products. This adherence to Syariah makes it appealing to Muslims.
As such, it is a common misconception that Takaful is only available to Muslims, when in fact, Takaful products are designed to meet the needs of society at large, including non-Muslims.
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Avoidance of Riba (Usury)
Takaful does not invest in financial instruments such as bonds and stocks which may contain elements of Riba. Moreover, by treating participants’ contributions as a donation with the condition of compensation, Takaful is able to keep this element out of its policies.
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Avoidance of Gharar (Uncertainty)
Conventional insurance contracts contain Gharar. Because the insurer could either retain profits or suffer a loss depending on the total amount of claims versus collections.
In contrast, Takaful contracts are upfront and clear about how much participants will be compensated if a claim is made, and even how much “profits” are redistributed back to participants in the event of surplus contributions. This allows the element of Gharar to be kept out of its certificates.
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Avoidance of Maysir (Gambling)
Maysir and gharar are inter-related. When there are elements of gharar, elements of maysir usually exist. Maysir exists in insurance when the policyholder pays a small premium with the expectation to gain a larger sum. If the event does not occur, the policyholder has forfeited the paid premiums.
Types of Takaful
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General Takaful
The General Takaful contract is normally a short-term policy and is comparable in purpose to conventional General Insurance. In this type of Takaful, there are no savings and investment components. The Takaful operator will distribute any underwriting surplus to the participants on an annual basis.
Some of the common General Takaful products include Motor Takaful and Fire Takaful.
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Family Takaful
Family Takaful is a long-term policy for which most participants aim at saving for their long-term needs such as children’s education, their pension and compensation for dependents. This type of Takaful has a long-term time horizon from ten to thirty years.
In Family Takaful, the operators usually divide contributions into two parts namely the participant’s investment fund (savings fund) and the participant’s risk fund (Tabarru’ fund). The second account is used in the case of potential losses of fellow participants who will be compensated according to a pre-agreed rate. Both accounts have to be invested in Shariah-compliant securities and the Takaful operator can either earn through fees or a share of the investment profits.
Some of the common Family Takaful products include savings, education plans and retirement plans.
Benefits of joining a Takaful scheme
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Risk Sharing = No Conflict of Interest During Claims by the Operator
Takaful and conventional insurance have the same goal which is to manage and cope with risk. However, fundamental differences in the initial contract makes Takaful fairer compared to conventional insurance. Where conventional insurance applies the concept of contract of sale and transfer of risk, Takaful contracts apply mutual assistance among participants.
Because the Takaful Operator does not profit from unclaimed monies, there is no conflict of interest by the operator when it comes time to pay out legitimate claims. This makes it appealing for anyone regardless of religion.
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Profit Sharing
If one does not make any claims, Takaful participants can expect some of the surplus of unclaimed monies to be returned in the form of cash backs. This too makes Takaful a scheme appealing to everyone regardless of religion.
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Able to Honor Religious Values
Knowing that the Takaful scheme is free from the elements of Gharar, Riba and Maysir, Muslims can participate in Takaful without worrying it to be haram. Simultaneously, by participating in a mutual assistance scheme based on Islamic system, it opens up an opportunity to perform ibadah (acts of devotion) which is a manifestation of servility, obedience and subjugation towards Allah’s orders.
Upon understanding the concept of Takaful, you will see just how it can offer security and well being for yourself and your loved ones and that Takaful is for everyone regardless of religious beliefs. For more information on what Takaful can do for you please visit http://www.malaysiantakaful.com.my/.
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