Difference between Takaful and Conventional Insurance

1. It is a Risk Transfer mechanism whereby risk is transferred from the policy holder (the Insured) to the Insurance Company (the Insurer) in consideration of 'insurance premium' paid by the Insured.

  It is based on mutuality; hence the risk is not transferred but shared by the participants who form a common pool. The Company acts only as the manager of the pool (Takaful Operator).
2. It contains the element of uncertainty i.e. "gharrar" which is forbidden in Islam. There is an uncertainty as to when any loss would occur and how much compensation would be payable.

  The element of 'uncertainty' i.e. 'gharrar' isbrought down to acceptable levels under Shariah by making contributions as "Conditional Donations" (tabarru) for a good cause i.e. to mitigate the loss suffered by any one of the participants.

3. It contains an element of gambling i.e. "maisir" in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). If the anticipated loss (claim) does not occur, the insured loses the amount paid as premium. If the loss does occur, the insurer loses a far larger amount than collected as premium and the insured gains by the same.

  The participant pays the contribution (tabarru) in the spirit of Ne'ea (purity) and brotherhood; hence it obviates the element of 'maisir' while at the same time without losing the benefit of Takaful in the same way as conventional insurance.
4. Funds are mostly invested in fixed interest bearing instruments like bonds, TFCs, securities, etc. Hence these contain the element of "riba" (usury) which is forbidden in Islam.

  Funds are only invested in non-interest bearing, i.e. riba-free instruments.
5. Surplus or profit belongs to the Shareholders. The insured is covered during the policy period but is not entitled to any return at the end of such period.
  Surplus belongs to the participants and is accordingly returned to them (in proportion to their respective shares of contributions) at the end of the accounting period.