The Takaful model has been in practice since more than fourteen centuries ago by one of the earliest Islamic communities. It has been widely available in Malaysia ever since its foray into the local market in 1993. Many are aware that insurance in Malaysia is offered through two options: conventional and Takaful. The current presumption surrounding this matter goes that conventional is available for everyone, while Takaful is offered exclusively to Muslims.
This is inaccurate, however, and continues to be one of the most common misconceptions about Takaful insurance. Read on to find out what are some of the biggest misconceptions Malaysians generally have about Takaful:
3 Biggest Misconceptions About Takaful Insurance
Misconception #1: Takaful insurance is only for Muslims
The truth: To sign up for a Takaful insurance plan, there is no requirement for one to be Muslim.
While Takaful insurance is indeed compliant with Islamic financial laws, it is not limited only to Muslims. Anybody can sign up for a Takaful plan!
Takaful is the shariah-compliant alternative to conventional insurance, and it is characterised by the elimination of several prohibited elements in Islam including:
- riba (interest)
- maysir (speculation)
- gharar (excessive uncertainty)
The core principle of Takaful is that it promotes fairness, and the prohibition of the above elements is to ensure all parties (policyholders and insurance provider) share the risk and benefits equally. Takaful respects all parties involved in the plan The objective is to avoid such situations where one party suffers losses.
- A policyholder starts an insurance plan, gets into an accident the month after, and receives a large pay-out after only one month of paying premium (viewed as a loss to the insurance company)
- A policyholder pays for protection against accidents but does not meet a single accident throughout the policy period (viewed as a loss to the policyholder)
Evidently, this ethical concept of risk-sharing does not necessarily apply to only one particular religion, but is relatable to anybody regardless of race and religion. Thus, this is why Takaful insurance is not a Muslims-only benefit and can be enjoyed by everyone.
Misconception #2: The purpose of Takaful differs from conventional insurance.
The truth: While the way it manages risk may be different, the end goal of Takaful insurance is still the same as conventional insurance – to protect policyholders in the event that something unfortunate occurs.
In conventional insurance, a policyholder purchases a plan and the insurance provider invests the premiums received for profit. This is how the provider is able to provide a pay-out of the sum assured in the event of death, critical illness, accidents and such.
Takaful, on the other hand, functions as a co-operative system, where a group of participants pool a sum of money together. In the event of death, critical illnesses, accidents and such, the pool of money is used to reimburse the affected participant.
Misconception #3: One form of insurance is better than the other.
The truth: Both forms of insurance come with their own set of characteristics. It is up to the policyholder to decide whether conventional or Takaful suits them better.
Profit maximization is the main priority for conventional insurance providers. By investing premiums received from policyholders, a conventional insurance plan is able to offer a contractually-guaranteed positive return to policyholders. However, do note that the channels invested in may not be shariah-compliant.
A positive return is not guaranteed for Takaful policyholders, however. Doing so is similar to receiving interest, which is one of the prohibited elements. However, Takaful insurance is rooted in moral values and encourages business conducts to be done with good faith, fairness and transparency.
Additionally, Takaful contracts generally specify how and when profits or bonus units will be distributed, if any. As Takaful plans are geared towards sustaining operations rather than maximising profit, the option to give back to society by contributing profits received to charity is made available.
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