The Islamic Ruling on Insurance

Written by: Sheikh Mubashir Ahmad Rabbani (Hafizahullah)

Question:​

What is the Islamic ruling on insurance, given that some scholars have issued fatwas permitting it?

Answer:​

Insurance in all its forms—whether it be life insurance, property insurance, or vehicle insurance—is considered haram (impermissible) in Islam. This is because insurance inherently involves both riba (interest) and qimar (gambling), both of which are explicitly prohibited in Islam.

Reasons for Prohibition:​

1. Combination of Riba and Qimar:
   • If the insured dies or suffers damage before completing all premium payments, the company incurs a financial loss.
   • If the insured completes all payments without incident, the company profits. This uncertainty constitutes gambling.
   • Additionally, when an insured individual completes all payments, they are given a return with added interest, making the transaction based on riba (interest).
2. Disruption of the Islamic Inheritance System:
   • The payout from an insurance policy is given to the nominee chosen by the policyholder, bypassing the rightful heirs as per Islamic law.
   • This disrupts the Quranic system of inheritance, which ensures that all rightful heirs receive their due share.
3. Contradiction to Belief in Divine Decree:
   • Islam teaches reliance on Allah and acceptance of whatever befalls us after taking lawful measures.
   • Insurance, however, represents an attempt to preemptively protect oneself from future risks using unlawful means, reflecting a lack of trust in Allah’s decree.

Hadith and Scholarly Views:​

The Prophet ﷺ said:

"It is better for a person to leave his heirs wealthy than to leave them dependent and asking others."
This Hadith emphasizes responsible management of lawful assets without resorting to illegitimate financial arrangements.

Some argue that insurance falls under mutual assistance or partnership; however, this claim is misleading. Insurance companies guarantee a fixed amount, which is predetermined, regardless of actual profits or losses. This predetermined surplus constitutes interest.

Analysis of Common Insurance Practices:​

1. Fixed Returns:
   • Even if insurance companies claim to invest the premiums in business ventures, they guarantee a fixed, pre-agreed amount.
   • Any excess or fixed return over the principal is classified as riba (interest).
2. No Genuine Loss Sharing:
   • In legitimate business partnerships, profits and losses are shared among partners. However, in the case of insurance, only the company benefits from profits, and any losses are borne by the insured in the form of lost premiums.
   • Even when companies present annual profit percentages, these are not genuine forms of profit-sharing but are merely a cover for interest-based dealings.
3. Rooted in Non-Islamic Systems:
   • The entire structure of modern insurance is a product of non-Islamic economic systems, specifically designed by those who oppose Islamic principles. The goal is to divert Muslims from the guidelines established by Islam for financial security and mutual assistance.

Islamic Alternatives:​

Islam provides legitimate ways to protect one’s wealth and ensure financial security, such as:

• Family and community support systems
• Waqf (endowments)
• Zakat and charity
• Cooperative financial support programs

Scholars’ Warnings Against Misguided Fatwas:​

Some scholars, influenced by Western economic thought, have issued fatwas declaring insurance permissible by highlighting its perceived benefits. However, such fatwas fail to recognize that insurance is fundamentally based on prohibited elements of gambling and interest.

The Quran warns against making baseless claims of permissibility or prohibition:

"And do not say, concerning the lies which your tongues utter, 'This is lawful, and this is forbidden,' to fabricate lies against Allah. Indeed, those who fabricate lies against Allah will never succeed."
[Surah Al-Nahl: 116]

Conclusion:​

• Insurance in its current form is impermissible due to its reliance on riba, gambling, and non-Islamic principles.
• Muslims are encouraged to seek lawful means of financial protection and to place their trust in Allah’s decree.
• Misleading fatwas issued in favor of insurance are a result of ignorance or willful submission to non-Islamic ideologies and must be rejected.

Understanding and adhering to the Islamic economic system is essential for preserving one's faith and avoiding the traps of interest and gambling that dominate modern financial systems.