Takaful or التكافل in Arabic can be translated as solidarity or mutual guarantee. (Source) In UAE, it is a type of Islamic insurance where people pool money to insure each other against any loss or damage. It is based on Shariah laws and highlights the responsibility of people to cooperate and protect each other.

Takaful has its roots in Islamic scriptures and has been reportedly practiced since 622 AD. Islamic scholars believe that commercial insurance is disallowed for Muslims because it contains Al-Gharar (uncertainty) and Al-Maisir (gambling). However, it is available to non-Muslims too.

Types of Takaful coverage

Takaful coverage can be broadly classified into three types:

  1. Takaful Life Insurance
  2. Takaful Non-life Insurance
  3. Takaful Reinsurance

Let’s look at the salient features of each of them.

Takaful Life Insurance

  • This is a mutual protection plan and all contributing members guarantee financial aid through the common fund under specific circumstances.
  • Members pre-decide a targeted amount to be accumulated over a set period of time. This type of insurance has a maturity period.
  • As a policyholder, you can have two accounts:
    Individual account – which can be used for your investment and savings. These investments are done in stocks of companies which are Islamic or follow the halal laws of Islam.
    Special account – is the portion of the premiums saved up to be utilized in times of need.
  • It is a completely transparent fund and a Sharia board supervises the fund managers to ensure that all laws are being followed and members are kept duly updated.
  • The insurance provider enters into a contract with the members, known as Mudaraba, to share the profits made from the investments. Insurance providers try to make maximum profits since they are partners in profits too. However, losses if any, are completely borne by the insured.
  • People insured to pay a Mudarib fee to the insurance provider for their services.
  • Wakala fees are charged for managing the insurance.
  • In the case of the death of the insured, the beneficiaries get regular life insurance benefits along with the profits earned from the investments. This amount is paid post deduction of administrative and operational charges.
  • If the insured is able to accumulate the entire amount till maturity, then he/she will receive their total premium along with the profits made through investments post deduction of some charges.

It is important to note that these features may vary with different insurance providers.

Takaful Non-Life Insurance

  • Takaful Non-life Insurance is available in many categories. Some of them are: Vehicles, Travel, Home, Personal Pleasure Boat, Agriculture
  • The basic principles of Takaful remaining the same, most of these policies have to be renewed annually.
  • Unlike life insurance, you will only have one account as a policyholder.
  • The accumulated fund is invested in Islamic products with the purpose of directing the money back to the fund to reduce administrative and investment costs.
  • This does NOT have a savings mode. On maturity, profits made from the investments, if any, are shared between the insured and the insurer. The premium amount collected is not returned.

Takaful Reinsurance or Retakaful

Retakaful is the Islamic alternative to reinsurance. In simple words, a Takaful company pays a premium to a Retakaful company so that it can cover some of its risks. This is important especially if a disaster strikes as the Takaful fund may find itself short of covering the member’s claims. A Retakaful contract operates similar to a Takaful contract with the difference being that the policyholders are other Takaful companies and the insurance provider is the Retakaful Company.

It is essential to understand the Takaful market in UAE to make an informed decision while insuring your life or possessions.

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