Are Insurance Haram?

It is clear to us that the relationship between the insured and the insurer does not constitute a partnership. The question then is, What is the nature of this relationship? Is it a relationship of cooperation? Are insurance firms to be regarded as cooperatives which are organized by their members to help one another, each member paying a certain amount as his share?

In order to establish a cooperative system on a sound footing in any group which desires to help its members in the event of unforeseen calamity, the following conditions must be met in regard to the money collected:

1. Every member who pays his allotted share of money pays it as a donation, in the spirit of brotherhood. From this pool of donations help is given to those who are in need.

2. If any part of this money is to be invested, it should be invested in halal businesses only.

3. It is not permitted to the member to donate his share on the condition that he will receive a pre-determined amount in the event of an unforeseen calamity. Rather, he will be paid an amount which will compensate his loss or a part of it, depending on the resources of the group, from the pooled monies.

4. What has been donated is gift from the donor, and taking it back is haram.(Taken from the book, Al-Islam wal-manahij al-ishtirakiyyah (Islam and Socialism), by Muhammad al-Ghazzali, p. 131.)

Apart from some of the Muslim cooperatives and associations in which the individual pays a certain sum monthly as a donation without any right to take it back and with no condition that he will receive a pre-determined amount in case of an unforeseen calamity, these conditions are not met. As far as insurance companies— especially life insurance—are concerned, they do not satisfy these conditions in any respect because:

1. The insured individuals do not pay the premium as donations; such a thought never occurs to them.

2. Insurance firms invest their monies in businesses which operate or lend their money on interest. All this is haram and the Muslim is prohibited to participate in such activities; the strictest and most permissive jurists alike all agree on this point.

3. In the event that the insured survives the term of the contract, he gets back all the premiums he paid plus some additional sum, which is nothing but interest.

Furthermore, insurance is contrary to the whole concept of cooperation among people. While the principle of cooperation requires that the poor and needy be paid more than the rich, the rich, who can afford higher premiums, get back much more in the event of death or an accident than the poor.

A Modification

In my view insurance against hazards can be modified in a manner which would bring it closer to the Islamic principle by means of a contract of "donation with a condition of compensation." The insured would donate his payments to the company with the stipulation that the company would compensate him, in the event that he is struck by calamity, with an amount which would assist him and reduce the burden of his loss. Such a type of transaction is allowed in some Islamic schools of jurisprudence. If such a modification is effected, and if the company is free of usurious business, one may declare insurance against hazards to be a lawful contract. However, as far as life insurance is concerned, I see it as being very remote from Islamic business transactions.

Note: Extracted from islamonline.net