TAKAFUL

THE ISLAMIC INSURANCE

Personal Finance & Wealth Management

Mitchell Josepher 01-201109-00285

Takaful
Originates from the Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee.

Takaful is commonly referred to as Islamic insurance.

Based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidary.

Takaful Industry
More than 40 takaful operators worlwide. It is estimated that the combined total assets of the

operators stand at around USD1 billion. The contributions (premium) of the operators stand at around USD500 million. Possesses high potential to expand because the insurance and takaful penetration in Muslims countries is less than 1% of GDP. In Malaysia, the insurance penetration rate is around 30% of GDP.

The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements :al-Gharar
There is the element of al-Gharar in both the life and general insurance policies. This arises due to the uncertainty of the subject matter of the contract or `ma'qud'alaih' of which one of the basic rules of contract in Islam is that the ma'qud'alaih must be clear. In such a contract the insured or the policyholder agrees to pay a certain sum of premium and in turn the insurance company guarantees to pay a certain sum of compensation (sum insured) in the event of a catastrophe or disaster. But the insured or the policyholder is not informed, for example, of how the amount of the compensation that the company will pay him is to be derived nor is he certain of the amount. In addition, any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is also classified as Gharar. This is prevalent in both the life and general insurance policies. In the former, for example the loss of premium suffered by the policyholder if he would have to cancel his policy before the policy acquires the forfeiture status. Similarly the "double-standard" condition of charging customary short period in general insurance if the policyholder is responsible for the termination of the policy whilst a proportional refund of premium is applicable if the insurance company terminates the cover.

al-Maisir
There is the element of al-Maisir (or gambling) which arises as a consequence of the presence of al-Gharar, in particular in the case of life insurance. When a policyholder dies before the end of the period of his insurance policy after paying only part of the premium, for example, his dependents will receive a certain sum of money which the policyholder in the first place has not been informed and has no knowledge of how and from where it is to be derived.

al-Riba
There is the practice of al-Riba (or interest) and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Shariah.

Basic Principles of Takaful

Principles
The principles of takaful are as follows: Policyholders cooperate among themselves for their common good. Every policyholder pays his subscription to help those who need assistance. Losses are divided and liabilities spread according to the community pooling system. Uncertainty is eliminated concerning subscription and compensation. It does not derive advantage at the cost of others.

Features
Firstly, the participation into a Takaful fund must be performed

with utmost sincerity in order to help those faced with difficulties. Every policy holder would pay his subscription in order to assist those who need assistance Any member or participant suffering a catastrophe or disaster would receive a certain sum of money or financial benefit from a fund, as also defined in the pact, to help him meet the loss or damage are examples for its permissibility.

Type Of Takaful

The general takaful concept is you contribute a sum of money to a takaful fund in the form of participative contribution (tabarru). You will undertake a contract (aqad) for you to become one of the participants by agreeing to mutually help each other, should any of the participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortunes as covered under the takaful you personally undertake.

The takaful protection plan is based on Shariah principles and offers many unique features to policy owners. There are two types of takaful businesses: family takaful and general takaful.

Family Takaful

General Takaful

Type Of Takaful

Family Takaful
Family takaful provides you with both a protection policy and long-term savings for your peace of mind. You or your beneficiary will be provided with financial benefits if you suffer a tragedy. At the same time, you will enjoy an investment return because part of your contribution will be deposited in an account for the purpose of savings. You have a choice of maturity periods and there is no forfeiture in the event of cancellation. You are also entitled to personal tax relief when you participate in family takaful.
Basic Type of Family Takaful Ordinary family - Individual family takaful The plans include education, mortgage, health and riders. You and your beneficiary will receive financial benefits arising from death or permanent disability, as well as long-term savings (investment), and investment profits that are distributed upon claim, maturity or early surrender. - Group family takaful This policy is for employers, clubs, associations and societies. The plans include group education, group medical, health and riders. A minimum number of participants are required to qualify under these plans. You will receive protection in the form of financial benefits arising from death or permanent disability. Retirement Annuity A plan that provides regular income upon your retirement. Investment-linked Takaful A portion of your contribution is used to buy investment units, such as units in equity or fixed income securities. The takaful protection covers death and permanent disability. A family takaful rider is an extension of the basic family takaful. The rider provides coverage against personal accident and disability, medical and health.

Investment linked takaful

An investment-linked takaful is a family takaful plan that combines investment and takaful cover. Your contribution gives you a takaful cover, which includes death and disability benefits, and also an investment in a variety of Shariah-approved investment funds of your choice.

Type of Cover

Single Contribution Plan With this plan, you invest one single lump-sum payment.The sum assured is usually a percentage of the single contribution, while the benefit payments are the sum assured and the value of the investment-linked units.This plan is more suited to you if you have a substantial sum ready for investment. Regular Contribution Plan This plan lets you make your contributions either monthly, quarterly, half-yearly or yearly . The sum assured is usually a multiple of the annual contribution . The benefit payment is the sum assured and the value of your investment-linked units.

Child education takaful

Child Education Takaful Plan (CETP) provides you with protection and long-term savings to finance the higher education expenses of your child. The plan will provide your child with financial benefits if you suffer any set back covered under the plan. The plan also gives your child long-term savings (or education fund),that your child can use to continue his/her studies.
Participating in a CETP also makes you eligible for personal tax relief of up to a maximum of RM3,000 per year for the combination of both medical and education plans. A family takaful rider or an extension of basic coverage for both you and your child is also available. The rider provides coverage against personal accident and disability, hospitalisation benefits, funeral expenses and critical illnesses.
Basic Type of Plan

Ordinary Child Education Takaful You and your child will receive financial benefits arising from death or permanent disability, as well as long-term savings (education fund), and investment profits that are distributed upon claim, maturity or early surrender.

Investment-linked child education takaful A portion of your contribution is used to buy investment units, such as units in equity or fixed income securities. In addition to the ordinary takaful protection, which covers death and permanent disability, the investment units will be sold upon claim, maturity or early surrender.

Medical & health takaful

Medical and health takaful gives you cover for the cost of private medical treatment, like hospitalisation, surgery and treatment, if you are diagnosed with certain illnesses or are involved in an accident. The cover acts as a standalone policy or can be added to a basic family takaful plan, providing better coverage and benefits from both policies.

Home takaful
There are two types of home takaful: The houseowners takaful The householders takaful. Houseowners takaful covers your home against loss or damage caused by floods, fires and other such perils. It not only protects your house, but also the garage, outbuildings, walls, gates and fences around the property as well as permanent fixtures and fittings. Householders takaful covers the loss or damage to the contents of your residential property. You may participate in a houseowners takaful or a householders takaful, or both for complete coverage.

Motor takaful
Motor Takaful covers you against loss or damage to your vehicle due to accidental fire, theft or accident. It also covers bodily injury or death of a third party as well as loss or damage of a third partys property. Similar to general motor insurance, there are two types of cover for a motor takaful plan namely: Third Party Cover This protects you against the third partys death, bodily injury and/or property damage. Comprehensive Cover This protects you against third partys death, injury and/property damage as well as loss and/or damage to your vehicle due to accidental fire, theft or an accident.

Personal accident takaful

Personal accident (PA) takaful is an annual plan that provides you or your beneficiaries with compensation in the event of death, disablement or injuries arising from an accident. You can either participate in a PA takaful for yourself or group plan for your family. PA takaful is also available for short durations, like when youre travelling abroad, to cover you should any accident occur during your travel period. While the basic PA takaful cover provides 24-hour worldwide coverage, there are exclusions to basic PA takaful. However, paying additional contributions, certificate holders can extend their cover to include the certificate exclusions. Check with your takaful operator on the additional coverage you can purchase for your PA takaful.

1. The Mudarabah model

Takaful products are based on two main business models:

2. The Wakala model

Mudarabah Model

1. The Mudaraba model: is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. The takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. This is commonly used in Malaysia.

Wakala Model

2. The Wakala model: is a contract of agency, which replaces surplus sharing with a performance fee. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region.

Conventional vs Takaful

List of Licensed Banking Institutions in Malaysia (Takaful Operators)

AIA AFG Takaful Bhd AmFamily Takaful Berhad CIMB Aviva Takaful Berhad Etiqa Takaful Berhad Great Eastern Takaful Sdn Bhd HSBC Amanah Takaful (Malaysia) Sdn Bhd Hong Leong MSIG Takaful Berhad ING PUBLIC Takaful Ehsan Berhad MAA Takaful Berhad Prudential BSN Takaful Berhad Syarikat Takaful Malaysia Berhad Takaful Ikhlas Sdn. Bhd

Well, somebody might be a little bit confused.Is Takaful only for Muslims? Here is the answer for that..