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Takaful for Expats in the UAE: What is it, and is it right for you?
Posted on Oct 31, 2016 by Travis Jones
While most expats in the UAE have health insurance, many of them are likely unfamiliar with the Muslim insurance product known as Takaful. Here, UAE Medical Insurance provides background information on Takaful and how it works. As well, we examine the similarities and differences between Takaful and conventional insurance to help you decide if Takaful is right for you. Read on to find out more.
Many people that move to the Middle East from other countries have a lot to learn when it comes to Muslim cultures. Things like food, holidays, and local customs can be fun and fascinating to learn about, and oftentimes have very obvious differences between cultures. There are, however, some aspects of Muslim culture that people may not be aware of, and even if some uninitiated people find out about some of them, they may not understand the reasoning behind why they exist, as it is often linked to interpretations of the region’s largest and most sacred religion. One of these items that many expats don’t have the foggiest clue about is Takaful. This form of insurance is one that is popular in the Muslim world for many reasons. Here, we will discuss more about the similarities and differences between Takaful and conventional insurance, and discuss whether this product would be beneficial to expats in the UAE.
What is Takaful?
The word Takaful comes from the Arabic word ‘Kafalah’, which means “guaranteeing each other” or “joint guarantee”, and is a good definition for the product itself. Takaful may be difficult to dissect at first for some, as the differences between it and conventional insurance may seem subtle at first, the philosophy behind Takaful is certainly quite a bit different.
Conventional insurance is based on the theory of risk transference. An individual may cover their risk by paying an organization, which will then pay them in the event that certain conditions are met, such as an unforeseen accident, serious illness, or loss of property. The organization will collect payment from numerous individuals, but ultimately it is responsible for honoring payments and managing all aspects of the pooled money, and no individual is responsible for any other individual that is involved with the organization.
Takaful on the other hand, is much more about risk sharing than risk transference. In Takaful, individuals pool their money together, and while there is generally an operator known as a mudarib in place to handle all the ins and outs of managing the funds in the pool, the participants do have a certain amount of responsibility to one another to help a member in need. To put it in terms that some people may be more familiar with, the conventional insurance is to Takaful much as banks are to credit unions. Now, before we go further into the similarities and differences between Takaful and conventional insurance, we should further expand your understanding of Takaful by highlighting the reasons it is was created, as well as why it is preferred to conventional insurance by many in the Muslim world.
The reason that Takaful became a necessity for Muslim’s is mainly threefold, but the general reason is that conventional insurance was interpreted to be at odds with Shari’ah law. More specifically, the aspects of conventional insurance that Shari’ah law does not agree with are as follows:
Uncertainty: Gharar, which is term that means uncertainty, but is also broad enough to mean fraud, risk, deceit, hazard, destruction or loss, is prohibited under Shari’ah law, and scholars have stated that the uncertainty attached to conventional insurance constitutes gharar. Any transaction where the outcome of a contract cannot be known falls under gharar. This could be something as simple as purchasing the unknown amount of milk in a cow’s udder, but it also applies to paying into something that you may never receive any benefit from, which is a common aspect of conventional insurance plans.
Gambling: Also known as maysir, scholars have linked insurance with gambling on the grounds that an individual can pay a small amount of money to an insurer and receive a large value in return. Furthermore, there is also a chance that a large sum of money can be paid out and the individual receives nothing in return. When viewed in these terms, it can be seen that insurance can often be very similar to a game of chance. Although, to be clear, there are two different types of maysir, with one applying to insurance and the other to gambling.
Interest: The Shari’ah principle of riba, states that all types of unearned income are forbidden in Islam. For this reason, loans featuring interest do not comply with Shari’ah law, as well as any predetermined monetary gain on a loan provided simply as a result of waiting. Essentially, Shari’ah views gains of this type to be exploitative and unjust.
Now let’s examine some of the similarities and differences between Takaful and conventional insurance.
As mentioned previously Takaful and insurance both involve the collective pooling of resources for the purpose of risk reduction on an individual level.
In order to participate in either Takaful or insurance, an individual must make contributions into a fund or pool of resources.
Both Takaful and insurance can help people out of normally catastrophic situations by giving them financial assistance in their time of need.
When an individual is paid out as the result of being paid by the pool, this is generally accepted as a loss by the other members of the pool.
Certain information must be given by the insured in either conventional insurance or Takaful in order for them to reliably make correct contributions to the pool. If incorrect information is given, an individual’s participation in the pool may be null and void.
As mentioned before, Takaful is a risk sharing structure, versus the risk transference structure seen with conventional insurance.
There is never any interest included in a Takaful agreement. Any funds used for maintenance of the scheme and payment to a Takaful organizer are considered donations.
Due to the prohibition of gharar, there is a guaranteed sum that every Takaful member will receive some amount of money at the end of their contract period (or reduced future contributions in some cases), which can vary depending on the use of the fund. This erases uncertainty from insurance.
While the operator of a Takaful fund will take some amount of payment for their service, the pooled funds within it still belong to the members, and not the organization controlling it.
Shari’ah law does not consider Takaful participants to be engaging in gambling as it is based on the principles of cooperation and trusteeship.
When a Takaful participant passes away, their beneficiaries are entitled to the whole of the premiums they paid into the fund, as well as the contract’s dividends, bonuses, shares of profits and a donation from the other participants. This is done on the basis of welfare for helpless people in society, such as the family of the deceased, and is certainly not a practice found with conventional insurance policies.
As you can see, Takaful is basically insurance that is highly focused on being ethical to all participants. Each participant entering it is expected to act with honor, good faith, and with the best interests of their fellow members taken into account. Seemingly, this would be a philosophy that any individual could embrace regardless of creed.
If you have any additional questions about Takaful and if it’s right for you, contact the knowledgeable insurance specialists at UAE Medical Insurance. While we do not currently sell Takaful products, we can answer your questions about it as well as give you plan options and price quotes for International Health Insurance, which generally goes way beyond the coverage that Takaful can provide.