Introduction to Takaful

Takaful is a type of insurance which is Islamic, or shariah compliant. Takaful products are open to all Malaysians with similar benefits and coverage as conventional insurance. Over the last five years, more and more Malaysians have participated in Takaful products. Read on to learn more about it.
 

Summary

•  Takaful is a type of insurance which is Shariah-compliant

• Like conventional insurance, there are two types of Takaful coverage:

  i) Family Takaful
  ii) General Takaful

• The main differences between Takaful and conventional insurance are the exposure to risk, types of investments, and beneficiaries.
• The contributions for Takaful products are generally similar to conventional insurance
• Be sure to participate in Takaful plans from registered Takaful operators and agents

 

DEEP, DEEP DIVE

How does Takaful work?

 Takaful provides financial protection if something unfortunate happens to you, based on Shariah principles. In a Takaful, you enter into a contract (aqad) to become one of the participants of a common Takaful fund where a pool of contributions by participants is shared to provide financial aid to those in need.

A Takaful fund is a pool of money which your contributions go into that will be used to pay for your claims. The money in the Takaful fund is usually invested in Shariah-compliant investment funds.

Contributions

Your Takaful contribution is what you pay monthly, quarterly or annually to your Takaful operator for your Takaful certificate. Your contributions will go towards the Takaful fund as part of your voluntary contribution (Tabarru’).

Claims

A claim is a formal request you make to your Takaful operator to cover expenses if you suffer any loss or damages covered by your certificate. In a Takaful plan, at the end of your coverage period, if you or the other participants in the fund did not make any claims, and the fund makes a surplus after your Takaful operator has taken an operator fee, you and those participants will get a payout from the fund.

The surplus is shared after calculating likely future claims and other funds which might be needed. This payout will be distributed to the eligible participants of the fund and the Takaful operator on a pre-agreed ratio following the terms of your Takaful certificate’s contract. The Takaful operator also gets part of the surplus based on participants’ agreement to reward the Takaful operator for its achievements or good performance in managing the Takaful fund which leads to surplus.

Risk-sharing

In a Takaful certificate, risk, which is the chance that something bad will happen to you[1], is shared between all the Takaful fund participants. So, when you make a claim, payment for your coverage is shared between you and the other participants of the Takaful fund. The benefit of this is that if you do not make a claim, you may be given any money that is left over from the fund after other claims and fees have been paid and if the fund makes a profit. The profit is from the investments made by the fund, as discussed in the Introduction of this How does Takaful work? section.

Sometimes, even if you don’t make any claims, there might not be any leftover money to be given back to you because the other participants may have made the claims.

With conventional insurance, the policy agreement is only between you and your insurance company only. Your risk will be transferred to the insurance company which will be responsible for providing you with the necessary coverage.

What are the differences between Takaful and conventional insurance?

Takaful	Conventional Insurance
Risk is shared between all participants within the fund, with the Takaful company playing an “operator/administrator” role and charging an operator fee.	Risk is transferred from you to the insurance company.
Funds are only invested in Shariah-compliant investments. Riba (interest) based investment instruments are not allowed (haram)..	Investments depend on the insurance company and can have elements of interest, uncertainty and risk.
Takaful operations are supervised by a Shariah Committee.	No Shariah compliance monitoring is required.
If there is no claim, profits or surplus from the fund may be distributed back to you in the form of surplus sharing.	If there is no claim, the surplus or profits of the insurance fund belong to insurers.*

Feeling brainy?

*This applies for most conventional insurance policies. However, conventional life insurance has two types of policies – participating or non-participating policies. Non-participating insurance policies are life insurance policies that do not entitle you to profits that the insurance company makes. Participating policies will entitle you to dividends that the insurance will make from investments. Do note that these returns are not guaranteed.

Although Takaful and conventional insurance have their differences, it is important to note that both types of insurance give you protection and savings.

 

What types of Takaful are there?

There are two main types of Takaful: Family Takaful and General Takaful.(Do click the links to our other insurance Guides to learn more aboutwhat to think about when choosing a policy)

Family Takaful

Family Takaful (similar to Conventional Life Insurance)

Like conventional insurance, you can get a whole Family Takaful plan or a term Family Takaful plan.

• In a Family Takaful plan, you can get a protection plan which covers you for a fixed period when you pass away or if you become disabled.
• A whole Family Takaful plan gives you financial protection in case of a tragedy while providing long-term savings. A part of your monthly contributions will be contributed to a saving plan. When the certificate expires, you will have some savings. If you become disabled or pass away before the certificate matures, you or your beneficiary will be given funds from your Takaful operator.

Investment-linked Takaful (similar to Conventional Investment Linked Insurance)

An investment-linked Takaful plan is a combination of Takaful coverage and investment. You choose how much of your contribution goes to your coverage, which includes death and disability. The rest is invested in a Shariah-approved investment fund that you choose. Each Takaful operator offers different options of funds to invest in.

Medical and Health Takaful (similar to conventional Medical Insurance)

A Medical and health Takaful plan covers the cost of medical treatment in hospitals, including surgery and hospitalisation. You could get this plan on its own or as an add-on (rider) to a basic Family Takaful plan.

Child Education Takaful (similar to conventional Education Endowment Policy)

Child education Takaful is a long-term savings plan to finance your child’s higher education. It also provides financial aid to your child if something happens to you (disability or death).

General Takaful

Motor Takaful (similar to motor insurance)

Motor Takaful covers you for loss or damage to your vehicle from an accident, theft, or accidental fire. Like conventional motor insurance, a comprehensive Takaful plan will cover any injury or death of a third-party and loss/damage of their vehicle.

Home Takaful

Home Takaful covers your house in case of a flood, fire and most natural disasters.

Personal Accident Takaful

Personal accident Takaful is generally a plan that provides you or your beneficiary some compensation in case something happens to you. This includes disablement, injuries from an accident or even death.

Can Takaful give you the same amount of coverage for the same price as conventional insurance?

Description	Takaful	Conventional
Annual Premium/Contribution (RM)	2,400	2,400
Annual Coverage (RM)	100,000	100,000

Source: We compared the prices and coverage for conventional policies against Takaful certificates, looking at one conventional policy and one Takaful certificate.

The table above shows that you may get the similar benefits for the similar rate or price from Takaful or conventional insurance products, depending on the chosen plan.

There are also some Takaful operators which offer value for money products with similar coverage for lower annual premiums.

Whether you are looking at Takaful or conventional insurance, you should always compare certificates/ policies before signing up for one. Click here for a comparison of some of the insurance policies available.

What do you need to look out for when getting a Takaful plan?

• First, make sure you are dealing with an agent registered with the Malaysian Takaful Association (MTA). You can check if your agent is registered here. You can also look at online or over-the-counter Takaful plans where you can deal directly with the Takaful Operator without any involvement of intermediaries such as agents, financial advisers, or bancatakaful partners. Currently, the Takaful plans that are available under these direct channels are term, critical illness, and medical and health.
• For Islamic finance products such as Takaful, the products must follow the financial institution’s internal guidelines and Bank Negara Malaysia’s (BNM) guidelines on Shariah-compliance. So, it is important to check that the Takaful operator is registered with BNM to ensure the plans/products offered are Shariah-compliant. If you’re getting coverage from a company that seems new or you’ve never heard of, check this list to see if they are registered.

 

Should you take a Takaful plan?

If you like the idea of risk sharing and possibly getting a surplus while being Shariah-compliant, you could consider taking a Takaful plan. Otherwise, compare both conventional policies and Takaful plans to find the one that can give you the most coverage for the contribution that you can afford.

Like conventional insurance, there are also a few other factors you need to look out for when participating in a Takaful plan. Do refer to our Guide on What to look out for when buying insurance to find out more.