Question # 72: Why is Life Insurance considered haram in Islam? How about life insurance which is provided as part of employment contract? Is it halal for the nominees/legal heirs to receive it after his/her death?
bismi-llahi r-raḥmani r-raḥīm,
Assalamu ‘laikum warahmatullahi wabarakatuh,
All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).
First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.
Shorter Answer: According to the prevailing contemporary Islamic Fiqh Assembly, life insurance is prohibited on account of the following main objections:
- It reflects disbelief in that Allah (سبحانه و تعالى) has decreed the moment of death of all human beings;
- Involvement of Riba (Interest) because the entitlement receive in most cases is more than the paid premium and the insurance funds are invested in interest-bearing securities;
- Involvement of Maysir (Gambling) because either the insured loses the money in the form of premium paid, when the event does not occur or his dependents receive the entire insured amount irrespective of the premium paid; and
- Involvement of Gharar (uncertainty) because the occurrence of a future event and the knowledge of its time is not known.
However, if the life insurance is provided and completely paid by the employer without deducting any part of the premium from the employee’s pay checks, it is considered a fringe benefit and therefore, the paid policy amount is Halal for the heirs of the deceased dependents, in case of death of the insured.
Long Answer: Let’s answer the three questions in sequence:
- The prevailing contemporary Fiqh trend prohibits life insurance, because it goes against the Muslim’s core of faith, which is built upon his firm trust that Allah (سبحانه و تعالى) is [the] Creator, Sustainer, Supporter, Sponsor and health Giver. And if a Muslim seeks insurance on his life, this would mean that he seeks help from an outsider other than Allah (سبحانه و تعالى) to support him in his life affairs. And this is what the Fiqh assemblies have decided upon, especially the Islamic Fiqh Assembly that was convened in Makkah in 1978, which recommended that life insurance is absolutely prohibited (Dr. Muhammad Muwaffak Al Ghaylany, Member of the Fatwa Committee of Assembly of Muslim Jurists of America)
Muslim jurists have opposed the idea of life insurance despite Muslim societies’ expectations towards protecting widows, orphans and other dependents in the society from unpredicted future financial risk. The main objections to life insurance are as follows:
- The conventional Life Insurance does not take into cognizance that Allah (سبحانه و تعالى) has ordained the time of death of all human beings. Therefore, it reflects disbelief that Allah (سبحانه و تعالى) has decreed the moment of one’s death, or distrust in Allah (سبحانه و تعالى)’s providence.
- Riba (Interest) is involved in the operation of the conventional life insurance system itself. First and foremost, the insured, on his death, is entitled to get much more than he has paid. Secondly, premium income and insurance funds are invested in interest-bearing assets and securities (financial instruments such as bonds and stocks).
- Maysir (Gambling) is assumed to be involved in the following instances:
- The insured contributes a small amount of premium in the expectation of gaining a large sum.
- The insured loses the money paid for the premium when the insured event does not occur. The insurance company will be in deficit if claims are higher than the premiums paid. When a life insurance policyholder dies after only paying part of the premium his dependants receive a certain sum of money which the policyholder has not been informed of and has no knowledge as to how and from where it has been derived.
- The idea of a conventionally designed life insurance policy is that if the assured dies at any time before the maturity of the policy, the nominee(s) is entitled to recover from the insurer the whole amount agreed in the policy. While if the assured is alive at the expiry of a permanent life policy period, the insured is also entitled to the whole amount agreed in the policy, plus the interest, dividends and bonus, subject to the company’s policy.
- The insurance contract contains excess uncertainty whereby a person pays a cash amount for payment of a claim against the occurrence of a future event when it is not known whether the event will actually take place and the time it will occur is also not known. Any form of contract which is characterized by the domination of one party at the expense and unjust loss to the other is classified as Gharar.
- The policyholder losses all the premiums paid to the insurance company on cancellation of a life insurance- this is considered unjust.
- In a conventional system of life insurance, the nominee(s) is an absolute beneficiary(s). Hence, on the death of the insured, the claim is paid to the nominated beneficiary which may in some cases be an unjust distribution considering the right of inheritance of legal heirs. (Abridged – Institute of Islamic Banking and Insurance London, UK)
- Monzer Kahf says “There is an old argument (from the 1950s), even by those who oppose insurance, that whenever insurance is forced by law, one must do it and one is excused, from Shari’ah point of view. This includes car insurance, social security, workman compensation, and employer’s imposed insurance if it is not optional for the employee. To this, I add another element that if the insurance provided by the employer is paid completely from the employer, i.e., given as a fringe benefit without deducting any part of the premium from the pay checks, then it is a kind of grant from the employer and if a hazard happens the paid policy amount is Halal because it is an outcome of the grant…”(Fatawa on Insurance 2000-2002) If your company provides this insurance to you for free without asking for your contribution, then there is no need for you to turn it down. (Dr. Hatem al-Haj, Member of the Fatwa Committee of Assembly of Muslim Jurists of America)
- Monzer Kahf says “This money is Halal for the heirs of the deceased [dependents]. If the money is paid directly from the employer account, it must have been part of the employment benefit; many employers have such a system. It is like part of the salary of the deceased paid after death, it is Halal. If the money is paid from a special fund run by the employer, it is also a fringe benefit to employment; it may be contributed to by the deceased and by the employer together or by the employer only, it is also Halal on the same ground…” (Fatawa Insurance 2004)
[Further to substantiate the permissibility of receipt of conventional insurance money by legal heirs,] Shaykh al-‘Uthaymeen (may Allah have mercy on him) was asked: If a person inherits wealth from someone, and he knows that part of this wealth, such as ten thousand or twenty thousand – is obviously haram riba, but he does not know about the rest, or it is mixed, then what should he do with the riba that is obviously haram?
He replied: There is nothing wrong with it, and it is halal for him, because he took possession of it in a permissible manner, namely inheritance. But if you know that this is the property of a particular person, and that the deceased took it by force, then in that case it is not permissible for you. But if it was haram because of the way in which it was acquired, such as riba and the like, then in this case there is nothing wrong with it. (Liqaa’aat al-Baab al-Maftooh)
Thus [the] …wealth that the company gave to [the dependents of the deceased] should be divided among the legal heirs… according to the shares of inheritance allocated to them by shari‘ah… (Sheikh Muhammed Salih Al-Munajjid)
Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.