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The matter of Insurance is not as easy as it looks. It takes proper thinking and planning when it comes to securing your financial well-being and guaranteeing that you and your family are shielded from the hard hits that occur in life.
Thus, insurance products are not the same. There are two types of insurance: Takaful and conventional insurance. As common as they are often considered to be, they are based on two completely distinctive ideas.
Here is a closer look at takaful vs insurance and their benefits and features. It will assist you in making the right choice.
What is Takaful?
Takaful, in essence, is Insurance in the Islamic law system, which is not permitted to take interest and goes against assumption or “excessive uncertainty” called gharar. It is a system far from the conventional insurance company that collects premiums and then earns from those premiums, but Takaful is a cooperative system. Here’s how it works:
- Mutual Contribution: The policy owners contribute money into a Takaful fund also known as ‘Tabarru’. These contributions are considered donations.
- Risk Pooling: The fund is accumulated for patients and is managed in such a way that all the members who may be involved in a loss will be provided with appropriate flyers to cater for the losses they have incurred.
- Profit Sharing: Also, the extra amount (profits) generated from the investments of the pooled premiums is divided among the participants, and no one particular insurance company gains it.
Pros of Takaful:
- Religious: Takaful is an Islamic concept that is compliant with Shariah law, and this will be suitable for Muslims who would like to invest accordingly.
- No Profit-Making Aim: It is a mutual help system devoid of a profit-making motive, which is ethical and moral in terms of business.
- Community Support: Another concept evident in Takaful is that of the community which comprises the participants in this form of financial innovation.
Cons of Takaful:
- Market Constraints: Takaful products remain relatively rare compared to conventional insurance. Hence, this will reduce the options available.
- Potential Higher Costs: This is because the ethical consideration and the mutual model result in higher costs than the traditional insurance costs.
- Complex Structure: Takaful is rather complex in terms of its form and can be quite difficult to understand when it comes to details and specific elements of the Takaful agreement.
What is Conventional Insurance?
Conventional insurance is indeed distinguishable from Takaful insurance, which has common attributes and principles of operation that are different from those of conventional insurance.
Here’s what defines conventional insurance:
- Risk Transfer: In this operation, policyholders transfer risk to the insurance company for an agreed form of compensation known as a premium.
- Business-oriented: Insurance policy corporations are organizations with the business objective of making profits. They collect them, fix them, and utilize the proceeds generated out of the investment to meet claims and expenses.
- Variety: Another difference between insurance and takaful is that conventional insurance has a range of insurance products that exist to address many risks, including health, life, property, and liability, among others.
Pros of Conventional Insurance:
- Diversification of Products: Traditional insurance provides an array of multiple products as per the customers’ requirements.
- Stable Industry: The traditional insurance business is relatively more stable than the new era’s high-tech insurance company.
- Customization: While traditional insurance plans also offer a good level of flexibility in terms of the scope of insurance offered.
Cons of Conventional Insurance:
- Self-interest: For the partners’ motivation, since the companies participating in an insurance business seek to make profits, the policyholders feel like they are serving the business rather than helping each other.
- Disputes/Confusion: When we talk about Takaful vs Insurance policies, they may contain numerous terms and conditions that can be quite complicated, hence can cause disputes or a lot of confusion among customers.
- Inapplicable to Islamic finance: Islamic believers cannot use conventional insurance since it violates Sharia law.
Conclusion
Takaful or conventional insurance is a matter of preference based on religious stance, objectives, and ambitions. If we talk about Takaful vs Insurance, Takaful, for instance, provides a completely different concept that is highly recommended by Islam. It provides an insurance concept that is based on saving up members’ money and providing mutual help. This is very much appropriate for anyone who has faith in Takaful insurance.
On the other hand, conventional insurance boasts a number of products that are accepted globally and have more flexibility than Takaful products, which are designed to cover a larger population.
Still need more information about insurance? Contact IGI Insurance, which is trusted by millions of people and is working hard to provide you with financial support when time and circumstances hit you hard.
Finally, realizing the difference between insurance and takaful and giving proper attention to one’s circumstances, one will arrive at the right insurance decision. It is thus important that the coverage provided, whether under Takaful or conventional insurance, is not only trustworthy but also consistent with the values and objectives of the policyholder.