This excerpt is taken from Dr. Yusuf al-Qaradawi's book Halal and Haram in Islam, translated into Urdu by Muhammad Tahir Naqash.
Insurance Companies
A modern form of business is insurance companies. There are various types of insurance, such as life insurance, accident insurance, etc. Here the question arises: what is its Islamic ruling? And does Islam want it to be maintained?
Before answering this, it would be appropriate to understand the nature of these companies and to know what kind of relationship the insured person has with the insurance company. In other words, does the insured person have the status of a partner in the insurance institution? If so, then every insured person should share in the profit and loss as taught by Islam.
In accident insurance, the insured pays a fixed amount annually, and if the insured business does not suffer any accident, the company takes possession of the entire amount and does not return anything. However, in the event of an accident, the predetermined amount is paid as compensation. This situation does not correspond to the nature of business and partnership.
In the case of life insurance, if a two thousand pound insurance is taken and death occurs upon paying the first installment, the insured becomes entitled to the full two thousand pounds. If the insured had the status of a business partner, he would only be entitled to the amount of his installment and the profit relative to it.
Another point is that if the insured does not comply with the company's rules and is unable to pay the installments, he loses the paid amount or part of it. Obviously, this condition is completely invalid.
As for the argument that both parties enter into this agreement with mutual consent and they know their interests well, this holds no weight because similarly, parties involved in usury also agree mutually, and two gamblers also gamble with mutual consent. Such consent is not valid unless the transaction is clearly based on justice, free from any suspicion of deceit, oppression, or injustice. It should not be that one party is guaranteed profit while the other's profit is uncertain. The fundamental principle is justice, which should be observed in all dealings so that neither oneself nor others suffer harm.
Are insurance companies institutions of mutual aid?
When the nature of the relationship between the insured and the insurance company is not partnership, then what is its nature? And are these institutions mutual aid organizations run with the cooperation of donors, where they financially support each other for the purpose of helping one another?
But with the aim that the correct form of cooperation is adopted and the victims are helped, the following matters must be considered regarding the collection of funds:
◈ An individual should pay a fixed contribution as a donation for brotherhood, and from this fund, needy people should be helped as required.
◈ Only legitimate means should be used to benefit from the fund.
◈ It is not permissible for a person to donate on the basis that in case of an accident he will receive a fixed amount as compensation; rather, from the institution’s fund, he should be given as much as possible to fully or partially compensate for the loss.
◈ Donation is a gift and it is forbidden to take it back. Therefore, when an accident occurs, the Shariah rulings should be observed in this matter.
These conditions apply only to a few associations and institutions established for this purpose, to which individuals offer their monthly contributions as donations, and they have no right to take it back, nor is there a condition that they must receive a fixed amount in case of an accident.
As for commercial insurance companies, especially life insurance institutions, these conditions do not apply in any way:
➊ The insured do not pay premiums with the intention of donation, and perhaps this thought does not even occur to them.
➋ Insurance companies invest their capital in forbidden interest-based (usurious) activities and earn profit. It is not permissible for a Muslim to participate in interest-based activities. Both the permissive and the strict scholars agree on this.
➌ The insured takes back the total amount of all premiums paid at the end of the contract period and also receives additional money. If this is not interest, then what else is it? Similarly, it is against the spirit of cooperation that a wealthy person who has the means is given more money compared to a poor needy person. It is true that a wealthy person insures a large amount, so in case of death or accident, he receives a larger share. But the spirit of cooperation requires that the needy be given more than others.
➍ A person who wants to terminate the insurance contract has to bear a large loss of the amount paid. There is no Shariah justification for this loss.
Reforms
Despite all these points, I believe that by reforming accident insurance, it can be brought closer to Islamic matters. The way to do this is to adopt the method of giving a gift on the condition of compensation. The insured gives a financial gift to the company on the condition that in the event of an accident, the company will compensate him, which will assist him and alleviate his hardship. This form of arrangement is permissible in some sects.
If this reform is made in the insurance matter and the insurance company's dealings are free from interest, then my inclination is towards permissibility. As for life insurance, in my opinion, its form is much more distant from Shariah matters.
Islamic Insurance System
We have seen that Islam, in its present form, opposes insurance companies, but this does not mean that Islam opposes insurance itself. Rather, Islam opposes the current methods and means of insurance. If other methods are adopted for insurance that do not contradict Islamic principles, Islam will welcome them.
In any case, it is a fact that the Islamic system has guaranteed insurance for the children of Islam and those living under its government through collective mutual support or through the government and Bayt al-Mal. The Bayt al-Mal of Islam acts as a public insurance company and is for every person who wishes to live under its authority.
Islamic Sharia accepts the responsibility of assisting individuals in accidents and calamities. When a person falls into hardship, he can present his case before the authority so that compensation can be arranged. Similarly, a guarantee is also given for the heirs after death. The Prophet Muhammad (peace be upon him) said:
أنا أولى بكل مسلم من نفسه من ترك مالا فلورثته ومن ترك دينا أو ضياعا فإلى وعلى
"I am closer to the believers than their own selves. Whatever wealth a Muslim leaves behind is for his heirs. And if he leaves debts or small children, then the payment of debts and the care of the children is my responsibility."
Reference: Bukhari, Book of Tafsir, Surah Al-Ahzab, Chapter: The Prophet is closer to the believers than themselves, Hadith: 4786; Muslim, Book of Inheritance, Chapter: Whoever leaves wealth, it is for his heirs, Hadith: 1619 with slight variations; Abu Dawood, Book of Kharaaj, Chapter: On the sustenance of offspring, Hadith: 2954; Ibn Majah 2416, similar to the hadith of Jabir bin Abdullah (may Allah be pleased with him)
Furthermore, the greatest thing Islam has made lawful for the insurance of its children is the share of the indebted poor (gharimin) in the distribution of Zakat. In its interpretation, some early commentators have transmitted that a gharim is a person whose house has burned down or whose wealth or business has been swept away by a flood, etc. Some jurists consider it permissible that from the income of Zakat, such a person be given enough wealth to restore his previous financial position, even if it requires giving him thousands in amount.
