Six crucial differences between Islamic & traditional life insurance.

For Muslims, Islamic Life Insurance or Takaful Plans are an excellent alternative to traditional life insurance. They help you protect against loss of income and secure your family's financial future. However, there is no restriction that only Muslims should buy takaful plans.

They are relatively popular in the Middle East, Europe, and East Asia, as they align with Islamic principles and religious values.

Despite their relative popularity, the penetration is still low, and more awareness needs to be created. 

This post aims to differentiate between Islamic life insurance and traditional plans. Understanding these differences can provide you the confidence to invest in Takaful plans to protect yourself and your family. 

Six basic differences between Islamic & traditional life insurance.

1. Purpose

The first and foremost difference between Islamic and conventional life insurance is the purpose for which the institution is set up.

Traditional life insurance companies are set up for profit, while Takaful companies are set up for sharing and distributing risk. 

Takaful in Arabic means a joint guarantee or shared responsibility based on mutual agreement.

Participants contribute their donations to the Tabarru' fund to jointly indemnify a defined loss or damage that may happen to each other.

2. Ownership 

Individuals, entities, or shareholders own traditional life insurance companies, while plan holders own Islamic life insurance companies. 

3. Concept

While traditional life insurance policies are based on transferring risk to the insurance company, life takaful plans are based on risk sharing among the participants.

The premiums received by traditional insurance companies are considered revenue, while the contributions received by takaful companies are donations.

4. Profit and Surplus Handling:

As discussed above, traditional life insurance companies are for-profit organizations. Hence, the surplus after paying claims and expenses is retained as profits.

Policyholders typically do not participate in the company's profits.

On the other hand, Takaful companies have to share the surplus after meeting claims and expenses with the plan holders.

5. Investment of funds

Traditional Insurance companies invest their funds in investments involving speculation and interest. They do not restrict the type of companies the funds can be invested in.

However, with takaful companies, the funds are invested in such a way that Gharar(Speculation), Riba(Interest), and Maisir(Gambling) are avoided. Takaful investments are guided by Sharia principles, avoiding investments in sectors like alcohol, gambling, and interest-based financial activities. Investments should be in halal (permissible) assets, such as real estate, ethical funds, and socially responsible projects.

6. Laws & Regulation

Traditional insurance companies are governed by government regulations only. In contrast, Islamic insurance companies are subject to government regulations and Sharia principles. A Sharia board draws the guidelines and oversees/ audits the operations of the takaful company in addition to the government regulations. 


Given the above differences, Life Takaful plans are an excellent alternative to Traditional Life insurance for people mindful of religious principles.

They provide international life cover with other living benefits at an affordable cost. 

Connect with me on a quick Zoom call if you want to know more or avail of a takaful plan to protect against loss of income and secure your family's financial future. 

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