Forward Planning: Islamic life insurance slowly becomes popular

Discussing life insurance's vital role in providing financial security either through the individual form or government social security may raise the question of wanting to know if Islamic life insurance exists.

Islamic financial products have evolved during the last three decades to answer people's needs for such products by catering to both one's beliefs and financial interests.

Traditional insurance which provides financial protection was not accepted by many Muslims for what it represented in defiance of God's will: the use of interest (usury), type of investment and the fact that "life insurance" appeared to be insuring lives and not income.

Also, life insurance in its existing form has been misunderstood due to the companies and agents' marketing and selling techniques often based on performance rather than on the client's financial needs. But at the same time life insurance is widely in use in all Islamic countries through the government social security system which covers death, disability and future pension.

The basic concept of life insurance has been accepted by Muslims from the beginning through the invitation of "Takaful" ( taking care of each other) which also means that the group must look after the individual who is in need or facing difficulties. It requires Muslims to never leave matters to fate but instead to proper planning and securing.

A financially secure Muslim who has proper control and better financial management of his personal finances is what the "Islamic Takaful insurance" is all about. Malaysia and Indonesia were the pioneers that first introduced Islamic Takaful insurance with its full Islamic investment capability to millions of Muslims.

Promotion

In the last ten years insurance companies in these countries recognised the importance of the clients' financial needs and started to promote Financial Security Planning dealing with financial analyses, establishment of financial goals and objectives, design of a personalised financial plan, debt elimination, estate planning and budgeting.

The Takaful insurance works almost like the traditional one except that it replaces interest (usury) with shared profits or losses, uses halal investments (allowed by Sharia) and its products are approved by a Sharia board. Mortality tables, reinsurance and the insurance contract exist with some modifications. Realising that all of us could face three life scenarios: living too long, becoming disabled (due to accident or sickness) or dying too soon, the Takaful insurance and life insurance provide financial protection and funds for all three situations. How much insurance we need depends on our income, existing government programmes we benefit from, our net worth and many other factors.

Security

Financial Security Planning conducted by a qualified and certified planner would reveal insurance needs which may change in the future if the personal financial situation changes. Islamic Takaful provides for a regular and systematic saving, financial protection, family income protection, children's future school funding, future financial goals, mortgage protection, disability income, future pension and retirement fund, standard of living protection and Islamic investment.

Takaful insurance also provides business owners with proper financial protection for themselves, key people, employees and the business itself (business continuation). Many new Islamic insurance companies which have started to operate in this part of the world will have the golden opportunity to provide financial protection and security to many if they can identify the clients' financial needs and respond to these.

Islamic Takaful products must be very competitive and offer options such as being flexible, high return (profit), convertibility (to other products), minimum company expenses and placing the financial interest of the policy-holder first. Since most life or Takaful insurance products are a long term basis — sometimes for a lifetime — proper selling is not only a must but a major requirement.

Islamic Takaful distribution through banks presents the "one-stop-shop" for financial services products to their clients. The integration of banking, insurance and investment products in the financial services industry has benefited account holders and policy-owners by providing a higher rate of return (profit), minimum expenses, easy enrolment, affordable programme and having to deal with one place of business only.

A few years ago many Muslims looked at insurance as something forbidden. Today, Islamic Takaful should solve that problem efficiently and finally provide people with peace of mind.

The writer is a UAE-based insurance consultant and director of Gulf Insurance Consulting