In the insurance world, you can purchase several products, packages, and coverages. And insurers are always coming up with creative names for new insurance products. So, most people aren’t surprised when they hear of a new insurance product. The problem lies in knowing its pros and cons.
Takaful insurance has existed for centuries, but not everyone knows about it. The simple concept behind this time-tested insurance policy originated from an Arabic word, which means insuring each other. Thanks to this cooperative concept, what began as a humble religious attempt to safeguard against financial risk has expanded into most Muslim nations, including Malaysia.
The good news is that Takaful isn’t only for Muslims. In this post, we’ll cover the pros and cons of Takaful insurance that separate it from conventional insurance.
Takaful, often translated as a mutual guarantee or “solidarity,” is an insurance backed by Islamic or Sharia law. It enables members to pool money together. This joint system guarantees each member during a fire, natural disaster, or other losses. Takaful’s religious backstory explains how members and insurance operators work together to protect each other.
Usually, Takaful policies protect different aspects of life such as health, automotive, homes, and even general insurance.
For those wondering about the key distinction between conventional insurance and Takaful, the answer lies in the latter’s compliance with Islamic regulations on riba (interest), al-gharar (uncertainty), and al-maisir (gambling).
Meanwhile, risk transfer is the primary element that renders conventional insurance non-sharia compliant. Hence, Takaful offers the same coverage using risk-sharing among members. This, according to Shariah, means one party shouldn’t assume the risk under the insurance contract.
Given the regulations of Sharia law, Takaful operators play a central role in ensuring the insurance operates smoothly while remaining compliant. They do so by managing and administering the Takaful fund for a pre-determined fee on the members’ behalf. As of 2019, Statista showed there were 336 Takaful operators worldwide. But with this sector of the global insurance market growing at 12% per annum (considerably higher than the 4% for the traditional insurance industry), the number of operators will also increase.
Over 20 years after its debut in Malaysia, Takaful Insurance makes a strong case for why those looking for alternate insurance products should consider this product.
You can judge yourself through its advantages and downsides compared to conventional insurance below.
Section 28 of the Islamic Financial Services Act 2013 (IFSA 2013) obligates financial institutions in Malaysia to ensure their values and operations, affairs, and conducts comply with Shariah principles. The nation supports this compliance via a two-pronged governance framework, noticeable at the institutional and industry levels.
The supervision, control, and regulatory framework of Islamic financial institutions in Malaysia further facilitates this compliance with Shariah principles. This displays the level of importance Malaysia affords Shariah and the businesses that operate by its rules. This institutional, national, and Islamic religious law oversight of Takaful firms, agents, and operators, as well as the Takaful fund, gives it a significant leg over conventional insurance products.
Though the benefits are many, some of the terms you’ll often hear in discussions involving Takaful are commission fees and Mudaraba or Wakala fees.
Every Takaful company licensed in Malaysia has a limited insurer’s profile. This profile showcases the firm’s financial strength and reflects the operational frameworks of the insurers. Therefore, potential policyholders are advised to check the limited insurer’s profile before choosing a specific firm. One thing to know about Takaful firms is that they don’t charge the typical shareholders’ fixed commission fee. Instead, they charge Wakalah and Mudaraba fees.
You can liken the wakalah charge to a regular service fee. However, it must be a fixed upfront amount, usually written as a percentage of a shareholder’s contributions.
This is a fixed percentage deducted from the net investment income by the Takaful operator for investing the insurance assets on shareholders’ behalf. These fees provide unique perks for Takaful participants due to the pool system of this insurance.
This pooling of member contributions means profit sharing without intermediaries, lower risk for shareholders, and readily available funds to settle insurance claims.
Apart from the global uptick of Takaful, Islamic insurance at the national continues to gain ground. Since November 1984, when the first Takaful operator launched in Malaysia, the number of operators, products, and shareholders has risen significantly. Today, Malaysia boasts the third-largest Takaful market worldwide per Islamic Financial Services Boards.
The worldwide Takaful industry is expected to expand from an initial 2020 valuation of $24.85B to a total 2030 valuation of $97.17B, a compound annual growth rate (CAGR) of 14.6%.
But this is no surprise when you consider the benefits of Takaful Islamic insurance for family members through packages like the Hajj Takaful plan. Continue reading to learn some of these advantages.
– Laying the foundations for a solid financial life can always begin at any age. However, It’s always better to start early. Takaful works for everyone, irrespective of age. Also, you get lower contribution rates the younger you are.
2. Offers multiple coverages – Depending on your Takaful operator, you can have different coverages. For instance, you can find protection against fire-related losses for your home and other properties.
3. Islam-specific packages – A classic example of the benefits Muslims derive from Takaful lies in the Hajj Takaful plans. Participants of this plan enjoy perks like:
4. Tax relief on contributions – You don’t have to worry about tax deductions if you sign up for most Takaful plans like Hajj and Umrah Takaful plans.
At some point, you may wonder what the catch is, given the never-ending upsides of Takaful branded insurance. And though you won’t be entirely correct, Takaful has some issues and weaknesses.
So, what’s the weakness of Takaful?
Overall, the Takaful industry continues to deal with several challenges, notably shortage of human capital, liquidity concerns, low innovation in business models for emerging market niches, and rigid governance practices.
Some general downside policyholders of Takaful may deal with are:
– Unlike their conventional counterparts, the varieties of Takaful policies on the market are limited. Nevertheless, you can readily get standard policies like life, auto, travel, and health.
Conventional insurance policies calculate policyholder premiums based on risk factors like age and occupation. On the other hand, Takaful holders pool their monies together, maintaining two separate funds (participant and policyholder fund and shareholder fund)
2. Risk assessment:
The primary distinction between the two is Takaful’s risk and reward sharing. Shareholders in a Takaful policy make yearly or monthly payments to a common pool. Takaful operators use this pool to pay valid claims of policyholders. Any leftover funds are shared as cash dividends. Risk assessment and pay-out are subject to the financial condition of the common fund. Contrastingly, conventional insurers pay out claims solely from the policyholder’s premiums, bearing both the risk and rewards.
Whether there are claims or not, conventional insurers consistently earn profits from the insured. But this isn’t so in Takaful; it operates based on tabarru.
Apart from these notable differences, the governing regulations of regular and Takaful also differ. Whereas conventional insurance is subject to the Financial Services Act of 2013, Takaful operates IFDA 2013.
These regulatory differences are even reflected in their written contracts. Whereas conventional insurance contracts entertain elements of uncertainty (Gharar), Takaful’s written contracts only allow complete clarity with zero ambiguity.
Typically, the only costs involved with Takaful are the monthly or yearly contributions (instead of premiums) and the previously mentioned fees (wakala and mudaraba).
To better understand the costs, let’s quickly review two popular Takaful products in Malaysia, MRTT and MLTT.
Mortgage Reducing Term Takaful, also known as MRTT, is a type of Takaful policy that provides coverage if you, the borrower or homebuyer, become disabled (TPD) or pass away.
Mortgage Level Term Takaful, or MLTT for short, is another policy that helps homebuyers out financially during death or TPD. It’s life insurance, and the guaranteed sum will stay the same for as long as the policy lasts. The mode of payment stands out as the primary distinction between these two takaful mortgage policies.
There’s no set price for an MRTT or MLTT insurance coverage because it depends on the total home loan amount the financing company offers. Other factors that takaful operators will take into account include:
Most people in Malaysia and the rest of the world have several misconceptions regarding Takaful, primarily due to its Islamic religious law ties. But in truth, anyone, including non-Muslims, can apply for Takaful policies and receive full benefits. Even if you already have a conventional insurance package, you can add Takaful coverage at a lower cost.
Takaful insurance has been around the block for ages and is going nowhere. Instead, you can expect more diverse policy plans, better rates, and profound expansion into the non-Muslim world. For devout Muslims looking to comply with their religious beliefs and safeguard their financial security, Takaful is a no-brainer. However, you’ll have to do some digging to find a reliable Takaful insurer and the right policy, especially in an Islamic country like Malaysia.
References
https://www.bnm.gov.my/documents/20124/792371/booklet.en.pdf
https://www.proquest.com/openview/1c1c6f1359e051bbebcbb2c448747422/1?pq-origsite=gscholar&cbl=29414
https://www.bnm.gov.my/documents/20124/8102422b-e6dd-d149-8db0-e3637e89ed5c
https://www.bnm.gov.my/documents/20124/792371/booklet.en.pdf
https://www.alliedmarketresearch.com/takaful-insurance-market-A11835
