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Insurance: Halal or Haram?

by Rakaan Kayali

September 14, 2023
10 min read

Table of Contents

Disclaimer: This post is for informational and educational purposes only, not financial or investment advice. The opinions are solely those of the author, not any organization. Consult a professional before making investment decisions, as all investments carry risk. The author is not liable for losses or damages resulting from the use of this information. Past performance does not predict future results.

Insurance is an arrangement wherein the insurer provides protection for the insured in the form of a guarantee of compensation in case a certain adverse event occurs. Some of the most common events that are insured against include death, illness, injury and loss of property.

In return for this protection, the insured makes a recurring payment to the insurer (often referred to as "Premium Payments").

Insurance and the Quran and Sunnah

From an Islamic perspective, Insurance is a good application of the Quran’s commandment in Sūrat al-māidah to:
“...cooperate in matters of righteousness and piety

For what is more righteous than the healthy taking care of the sick and the able taking care of the disabled and the families who have a breadwinner taking care of the families that lost theirs. These righteous acts happen when people participate in insurance.

The Prophet Mohammad (ﷺ) says:

“Whosoever reduces the burden of a worldly calamity on a believer, Allah will reduce the burden of a calamity from the Hereafter on them.”

Narrated by Muslim in his book "Sahih Muslim"

Insurance is the embodiment of helping others in times of calamity. The payments you make to an insurance company, with which you are purchasing protection for yourself, are partially going to the insurance company as profit and the other part is going to cover the financial burden of some other insured person who has had a difficult event befall them.

So you’re reducing the burden of a worldly calamity on another person and adhering to the prophet’s encouragement to do just that.

Insurance in Islamic History

The prophet (ﷺ) also encouraged the use of insurance through his actions and decrees. 
In the first constitution of Madinah which was drafted by the Prophet Muhammad (ﷺ), there is an actual mandate for tribes to insure their members in case one of them needs to pay what is known as "Blood Money".

Blood Money is money paid to the relative of a murder victim as a fine. This system was known as “Aqila” amongst ancient Arabs. It was a way for conflicts to be avoided and cycles of bloodshed to be ended by forcing the aggressor to pay a monetary penalty.

The prophet (ﷺ) was ensuring the fire of conflict between tribes was always being put out through making sure the funds to pay blood money were always available and he did this through a system of tribal insurance.

Later, as Muslim traders expanded to markets in the Indian subcontinent, and reached places as far as present-day Malaysia and Indonesia, they often experienced large losses when ships were lost at sea or raided by pirates.

To address these risks traders often agreed before they started their long journeys to an insurance-like arrangement wherein they would contribute to a fund that is used to compensate any member who suffered losses during the trip.

It is conceivable that without these insurance arrangements, early Muslims would not have found it economically viable to go on these long trading trips and Islam would never have spread to places as far as Malaysia and Indonesia.

So, from the Quran, the actions and sayings of the prophet Muhammad (ﷺ) and the precedent set by Islamic history one can make a strong argument not only for the permissibility of insurance but its virtue as well.

Recent Objections to Insurance

Unfortunately, in very recent history some prominent voices have deemed insurance forbidden in Islam. Most notably in 1977, the Islamic Fiqh Council in its first session ruled to prohibit commercial insurance.
There was a dissenting view in the council which I’d like to recognize here which was that of sheikh Mustafa Al-Zarqa who found no credible objections to commercial insurance.

The tragedy is that since the opinion of the Islamic Fiqh Council many Muslims have voluntarily denied themselves the benefits of insurance in order to adhere to what they were told their religion demands.
Now, of course, those who think insurance is prohibited in Islam have specific objections that they cite so I’d like to address these objections in a way that should leave no doubt for the reader. Let’s start with the first objection.

Objection #1: Insurance Involves Gharar

Insurance involves Gharar (deception or unnecessary ambiguity); This is because the benefit received from purchasing insurance is unknown at the time of sale i.e. whether or not the insured collects any money or receives any benefit from purchasing insurance is dependent on unknown future events. 

Response:
The mistake in this argument is in the understanding of what Gharar is; it is being implied that Gharar arises in transactions where the benefit is unknown. This is demonstrably false on account that it is very rare for anyone to know beforehand the exact benefit they are going to receive from something they've purchased. You can buy a pair of sunglasses and lose them before you ever wear them, you can pay to have your car equipped with airbags and never get in an accident, you can purchase a fire alarm for your house and no fires ever happen. So, Gharar cannot be defined as arising in transactions wherein the benefit is unknown.

So what is Gharar? well let’s look at what the prophet (ﷺ) actually said about it.

The examples of Gharar the prophet (ﷺ) gave us are: the sale of fish in the sea, or birds in the sky, or an unborn calf in its mother’s womb. In these examples, it’s not the benefit of the sale that is unknown, but rather what is being sold. With fish in the sea, I don’t know how many fish there are, how much they weigh, what type of fish there are, or even if I’ll be able to catch any. The same is true with a calf in its mother’s womb; I don’t know what’s in the mother’s womb... it could be male, it could be female, it could be twins, the fetus may come out dead, etc.

So, Gharar arises when the object of sale isn't properly defined, not when the benefit of the sale is unknown.

In the case of insurance, it is true that the benefits from purchasing insurance are unknown (like almost anything else) in the sense that you don't know how often you will need it (although one can argue that you gain peace of mind regardless, but let’s ignore this in order to give the objectors to insurance the strongest possible argument they can have). However, what you’ve purchased in the case of buying insurance is very precisely known, namely, a legally binding promise from the insurance company that it will cover a certain expense or pay out a certain amount in case a particular risk materializes. This promise is defined with the utmost amount of precision: You know how much the insurance company will payout, under what circumstances, and over what time period the promise to pay will remain active.

I suppose a source of confusion for those who claim that insurance involves Gharar is that they think an amount of money is being purchased by the insured and that this amount of money is unknown. However, if the purpose of getting insured was to receive an amount of money, people who had insurance would hope to use their insurance in order to collect that money. This is demonstrably not the case.

People who have medical insurance don’t hope to fall ill, people who have disability insurance don’t hope to become disabled, people who have accident insurance don’t hope they get in a car accident. People who have insurance hope they never need it! So they are certainly not purchasing money nor hoping to receive it rather they are purchasing a legally binding promise from the insurance company and in most cases hoping they never need it.

Once one understands that Gharar arises not when the benefit of sale is unknown but rather when the object of sale is unknown and that the object of sale in insurance is a legally binding promise and not an amount of money, it’s immediately apparent that insurance does not involve any Gharar.

Objection #2: Insurance is Gambling

The contract can be considered gambling because it pays you money without requiring you to do any work and the amount you benefit is based on luck.

Response:
As we've mentioned, people don’t buy insurance to make money. They buy insurance in order to avoid financial hardship. Anyway, insurance companies only pay out an amount of money that is commensurate with the damages incurred and often the insured never even touches the money that is paid out by the insurance company; it goes directly to the medical care provider or to the auto mechanic or whoever provided the remedial service for the event that was insured against.

If you say insurance is like gambling because minimal effort is put into earning the money that is paid out by the insurance company, what’s your stance on inherited money? How much effort is put in by the heirs to earn the wealth they’ve inherited from the deceased? Is inheriting money forbidden in Islam because no effort was put into its acquisition?

If you say insurance is like gambling because the amount of benefit you receive is based on chance, the same can be said about a lot of things. Take a security guard for example. The amount of benefit you receive is based on whether or not you get robbed. Something you have zero control over. So is hiring a security guard forbidden in Islam?

Other than trying to get rich, people gamble because they find it entertaining. When was the last time you heard of anyone buying insurance because they wanted to have a good time?
If you think of gambling as an unnecessary assumption of risk that can cause financial loss, the logical question to ask is not whether having insurance is gambling but rather is not having insurance a form of gambling?

With all the unexpected expenses that we face in life, and how expensive things have become, and the fact that many people go bankrupt even with the support of insurance, one can make a strong argument that voluntarily choosing to not have insurance is a form of gambling.

We know that one of the reasons Islam prohibits gambling is because it often causes financial hardship for the players. When was the last time you heard of someone experiencing financial hardship or ruin because of insurance? isn’t it the other way around? don’t people experience financial ruin because they didn’t have insurance when they needed it? Perhaps many of the readers know someone close to them who has gone through such hardship.

The fact is insurance is not gambling but Not having insurance may be.

Objection #3: Insurance Involves Riba

It involves interest (Riba) because the money paid out by the insurer may exceed what the insured paid in premiums.

Response:
First, let’s be absolutely clear, neither the money received by the insurer nor the money received by the insured is a loan. In neither case is there any obligation to pay back the money received. After all, the definition of a loan is an amount of money that you have to pay back.

Now, let’s talk about Riba. The type of Riba which is being referred to is commonly known as interest. Interest causes an amount of debt to increase with time. This increase is what is prohibited in Islam. In insurance, one can pay for a short period of time and receive a large amount and alternatively pay for a long period of time and receive no money in return. So, clearly the amount of money received by the insured and the insurer is not based on the passing of time like interest is.

In other words, both elements of interest which are the existence of a debt and an increase in the amount of that debt with the passing of time are absent in insurance. So, it definitely does not involve Riba.
I guess the source of confusion among those who claim insurance involves interest stems from the fact that an insurance contract is understood as a transaction involving only money. Put differently, for many commentators, the only identifiable elements in an insurance contract are the money the insured is paying and the money the insurer is promising to pay if a certain event occurs.

This is not true. An insurance contract involves the exchange of two things: money and risk. The insured is selling their risk to the insurer and because risk has a negative value they are paying the insurer to buy it from them.

In other words, the insured is buying a legally binding promise from the insurer. No loans and no contractual guarantees that money will grow with time means there is no Riba.

Objection #4: Insurance Companies Profit From Riba

Insurance companies invest their money in interest-bearing products and pay their customers from the proceeds of such investments.

Response:
Where do people who repeat this argument think non-insurance companies keep their cash? They keep it in interest-bearing bank accounts. If you are going to make dealing with any company that uses interest-based products in their operations forbidden in Islam I don’t think you’re going to have many products left to choose from.

Take the technology company "Apple" for example. Did you know that in 2013 Apple held more than 30 billion dollars in interest-bearing loans? Despite this, no one argues that buying an Apple phone is forbidden in Islam. Or that buying a washer and dryer made by General Electric is forbidden since GE operates a huge lending business. So, why are we making a specific exception for insurance and saying that it’s haram?

In order to be consistent, we must say that if an insurance company managing its cash using interest-bearing products makes purchasing insurance Haram, then purchasing anything from any company that uses interest-bearing products to manage their cash is Haram.

If the latter isn't true, and I don't think that many argue it is, then the former isn't true either.

Conclusion

I find that commercial insurance:

  • Uses cooperation and the law of large numbers to provide much needed financial protection for consumers which is encouraged in the Quran, the life and sayings of the prophet Muhammad (ﷺ) and the precedent set by early Muslims.
  • The object of sale and purchase in insurance is a legally binding promise from the insurance company, which is well-defined at the time of the sale, so it does not involve Gharar.
  • Insurance reduces people’s financial risk so it’s really the opposite of gambling.
  • It’s not interest (Riba), because there is no loan nor is there a contractual guarantee of monetary gain for either party.
  • It does not require the involvement of interest-based products and therefore shouldn’t be classified as such.  

Based on this I find that insurance is permissible in Islam, it’s halal, and if you’re convinced with what I’ve said I encourage you to get insured against the major risks in your life especially health, automobile, and life insurance if you can afford to do so.

Further, I believe that not purchasing insurance in some cases is inconsistent with the prophet Muhammad’s (ﷺ) direction to “Think things through before you claim to depend on Allah”.

If you turn on your car and you have no plan for what you’re going to do in case, God forbid, you get in an accident, I don’t think you can claim that you’ve thought things through.

Frankly, a more challenging question than: “Is insurance permissible in Islam?” is “Is not having insurance permissible in Islam?”

Last note, despite that I think insurance is Halal I’m not saying that how insurance is provided today is necessarily the most efficient system out there. I encourage people to think about how to make insurance more efficient.

You may be wondering what I think about Takaful, erroneously referred to as "Islamic insurance", I encourage you to read more here.

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Comments

26 responses to “Insurance: Halal or Haram?”

  1. u09s says:

    Don’t follow anything that this article presents!
    Everything in this article is wrong according to the Islamic jurisprudence.
    Every objection is based on rational arguments or some incorrect understand of the shariah and the principles of sharia.
    The author haven’t even understood the reality of insurance or even the reality of riba, which is clear for anyone having some proper understanding of the reality of these.
    The author is moreover not referring to the shari' evidences properly as is required when giving and Islamic verdict on a matter.
    Here is a proper explanation with complete analysis of the reality of insurance and thereafter a proper Islamic verdict based on the shari’ evidences.
    http://islamicsystem.blogspot.dk/2007/02/prohibition-of-insurance-in-islam.html?m=1

    • *"Evidence" not "evidences". “Evidence” is already plural.

    • ali darwish says:

      I read the post you have at islamicsystem.blogpost.dk/.... and I find the arguments in it very weak. I find the argument presented by br. Rakaan far more coherent and sound than the poor logic presented in the islamicsystem.blogpost. I also don't appreciate the attack on a fellow Muslim.

  2. Farooq says:

    That is the worst article on finance by minpulating the definiations.riba is not that stupid man claim.

  3. Bilal says:

    AT least, someone is thinking rationally.

  4. rhannah99 says:

    I think your argument about the "object of purchase/sale" is key. In insurance whether takaful or conventional the object of purchase is risk protection. Some myopic Islamic scholars don't recognize intangibles like risk protection as objects with value, while obviously to me and to you they are.
    The concept of risk preference (gambling) is opposite to that of risk aversion (insurance). Scholars who equate the two need to think again.

  5. Ammaar says:

    This is absolute bunkum. It is a desperate attempt at searching for loopholes and circumventing what Islam has ordained. Good luck with that. Your scroll of deeds. Fill it with what you like.

  6. Brother, this post is in Urdu (which I don’t speak) If there is a particular argument you would like me to respond to please let me know.

  7. As-salamu-alaikumBr. Rakaan. I like your two articles on Insurance as well as Takaful. I would like to cite them in my critique of the flawed ijtihad of the contemporary 'ulema. Please keep up the good word.
    Was-salam.
    Muhammed-Shahid Ebrahim
    Professor of Islamic Finance
    Durham University, England.

  8. Usman Majid says:

    Brother Rakaan, could you please share your Islamic credentials / qualifications which permit you to share the halal / haram rulings on your website? Or are these just personal opinions?
    This is a serious question, as I'm genuinely looking for answers, and one of the first things we're taught as students of Deen is to understand who we're learning from.

    • ali darwish says:

      AA Br. Usman,
      Your question to br. Rakaan about his credentials is a valid one. If he's a scholar, we'd feel better. If he's not, then we need to learn more and read more. However, at no point should we automatically accept or reject an argument because we love/hate the source. An argument stands on its own and may be confirmed/refuted based on reasoning. The approach of rejecting arguments because we don't like the source is the same approach used by those who rejected the messages of Allah.

  9. K says:

    I work in the insurance industry, bang on about everything you have written.
    Well done!!!

  10. Taha Dhailey says:

    Some counter arguments
    All forms of commercial insurance are fraudulent transactions aimed at consuming people’s wealth unjustly. The precise statistics calculated by one of the German experts state that what people get back of what has been taken from them is no more than 2.9%.
    Insurance is an immense loss for the nation, and there is no evidence or excuse to be found in the actions of the kuffaar who have lost the ties of kinship and friendship and are therefore forced to resort to insurance, which they hate as much as they hate death.
    These are only some of the violations of sharee’ah which insurance is essentially based upon. There are numerous other violations which we do not have room to mention here, and there is no need to do so, because just one of the violations which we have mentioned above is sufficient to make insurance one of the things which is most prohibited in the sharee’ah of Allaah.
    Althought you have already given counter arguments for one statements regarding gambling but as a whole check this out: https://islamqa.info/en/answers/8889/the-true-nature-of-insurance-and-the-rulings-concerning-it

  11. Taha Dhailey says:

    One more from same link
    All forms of commercial insurance are based on uncertainty of the most extreme kind. Insurance companies and those who sell insurance refuse to insure cases except where there is clear uncertainty in whether or not the condition being insured against will happen or not.In other words, the condition being insured against must have a possibility of happening or not happening (as opposed to, for example, someone who has a pre-existing condition, such as a person who is on death row applying for life insurance--translator.) Moreover, this transaction involves something uncertain, which is when an accident will happen and the extent of the damage caused. Hence insurance combines three kinds of extreme uncertainty.

  12. Taha Dhailey says:

    Third argument, the two hadiths you have mentioned in the beginning is for Muslim and not for Wealthy non-muslim organizations(insurance companies).
    Can you also provide the history fact reference regarding the insurance muslims had while traveling..
    Fourth argument: you mentioned "You can buy a pair of sunglasses and lose them before you ever wear them, you can pay to have your car equipped with airbags and never get in an accident, you can purchase a fire alarm for your house and no fires ever happen.".
    When we loose sunglasses or accident happen and airbags comes out or fire causes our fire alarm, we do know the output of the transaction unlike insurance they are only provided when the uncertainty is extreme. if you already have heart problems, you wont get insured (or will get a very low amount of insurance) OTOH no company will deny putting an airbag in a 100 year old car. Hence insurance is Gharar and Gamble both.
    I do agree with your point that in Gamble the winner expects to get the money back unlike insurance. But this is the opposite, the main Gambler player is the insurance companies who are expecting the money to use and hoping the insured never use it. It is a gamble from the insurance company side. The fire alarm company or airbag company or sunglasses company do not worry about you using it or not, they are not praying you never get a chance to use their service rather they are more happy if you counter any situation where you have to use their service more often.

  13. judeshayeb says:

    A very interesting and informative article. Keep up the good work!

  14. Yasir afifi says:

    Salam Raman, just my opinion but reading what you wrote it feels like the way insurance would be made halal is if a particular risk was not to materialize then your money is returned. So for example you buy a vehicle and you pay $500 a year for insurance. Over the course of the 12 months you don’t need to use any of the insurance services (i.e you didn’t get into any accidents, crashes, etc). Then that $500 should be returned to you or rolled on to the next 12 months, otherwise I fail to see what exactly you are paying.

  15. Sarah says:

    Hi Dr. Rakaan, thank you for the comprehensive article. I was looking for islamic opinions when it comes to insurance, and I found your article very helpful.
    I agree with most of your arguments, however one thing I am still hung up on is your analogs with Apple. Surely a purchase transaction of an iPhone is not an apple-to apple comparison (pun intended) with purchasing insurance product. While Apple as a company may invest its profits in interest-bearing instruments, what the consumer purchased is an electronic device and software services which Apple made a profit off of. Whatever Apple does with their profit isn't directly tied to the iPhone as a product itself. A proof would be that we can sell secondhand iPhone as we wish; Apple's corporate investment does not affect our sale at eBay.
    Sure, there will be some entanglement, but the degree is much removed than conventional insurance product, because insurance product itself is tied into investment strategy to grow the fund collected. I.e. iPhone as a product is a physical product that exist independently from how Apple as a company invest their money, whereas insurance product has investment strategy embedded directly into the product. Without the investment strategy, the insurance contract cannot be fulfilled. This is coded as law via standards like FAR (Free Asset Ratio) and others that will directly implicate whether an insurance product is viable to be bought and sold or not. While iPhone can be bought and sold as long as the device exists, Even Apple company specifically has been consistently in the list of halal stocks, since they fulfil the 5% interest-bearing asset threshold, if we want to go that way. .
    The enmeshment with riba-bearing between insurance product vs tangential product is, therefore, very different, with the former having direct and undeniable link. The implication would be that insurance is halal, only if the core investment strategy that is tied directly to the means of how the insurance company is paying the claims is halal. Takaful, as you mentioned, is halal at its core; but what if the fund collected was being lent akin to loan shark, and then the capital interest is the one paid as the blood money? Surely it would be ruled as haram at that time.
    Do let me know what you think; I am looking for insurance options for my family, however, I fear that I push them to the wrong direction and want to cover all the sharia bases. Above all, I'm open to different opinion and arguments, because I believe that's how we can progress as ummah.
    Thank you!

    • Salam sister Sarah,
      My mother would be very pleased to hear you refer to me as Dr. Rakaan. Although, in the spirit of full disclosure I must tell you that I am not a Dr.
      I appreciate your thoughtful comment. Here's what I was trying to say: The product you are buying with insurance is an amount of financial protection. You are not buying a share in the company. How the company manages its finances is the concern of the shareholder not the customer. Whether the insurance company manages its finances with interest bearing products or something else does not affect your rights and obligations under the insurance agreement you have with them. While there is admittedly a much clearer connection between a company's cash management policy and its insurance payouts than there is with Apple and its ability to provide ongoing support to the hardware and software it sells, I think there still is a connection. In an extreme case you can imaging a scenario where a phone company is only staying afloat because of the interest-bearing debt it is using to run its business. Are people who purchase phones from this company at fault? Can we say their purchase is Haram?
      Perhaps an analogy that would be more clear would be to say: imagine you are returning your apple phone for whatever reason. Are you at fault if your refund is paid to you from the interest that Apple has collected on its cash holdings?

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