There are many types of insurances in practice today. Most common one is the car insurance, which is required by law in many countries to drive on the road. Then there is life insurance, contents insurance, home insurance, etc.
Insurance usually requires one to pay a relatively small amount of money (compared to the value of the product being insured) in advance or in instalments. If an incident occurs, such as death or a car accident, the insurer pays a larger lump sum amount to the insured party; the amount paid out is in the multiples of the original amount paid by the insured party.
Generally, insurance is considered haram in Islam with some exceptions, such as car insurance enforced by law; some ulema permit this.
Insurance vs Gambling:
Many Muslims including ulema equate Insurance with gambling hence consider it haram. There are similarities in both, however if we consider carefully, the primary purpose of gambling & insurance is completely different.
Gambling is primarily conducted to win money on predicting the outcome of an event, usually a sport.
Whereas primary purpose of insurance is not to win but to secure (guarantee) the payment of an amount if certain event (loss) occurs.
Insurance as a Guarantee:
Sometimes insurance is considered as a ‘Guarantee’ (Zaman in Arabic). Guarantee is allowed in Islam with the following condition:
- Guarantee has to be a Voluntary act; it cannot be offered by taking a benefit (a price).
But insurance requires a payment hence insurance is not a valid guarantee from Islamic point of view.
Insurance as a Sale:
Any commercial transaction starts with an agreement, a ‘Sale’ contract between two parties. Islam being a comprehensive system for life, provides detailed rules for Selling.
Examining the Insurance Sale Agreement, one can observe that there are a number of issues from Islamic point of view:
1- Sale is conducted on a specific & defined product or a service. This is not the case in Insurance; it is merely a promise to pay some amount in future rather than a service or a product.
2- Delivery of a product or a service must be certain. It must not depend on an unforeseen event. e.g. if X happens then Y will be done.
“The Messenger of Allah (SAW) prohibited sales of ‘whatever a pebble thrown by the seller hits,’ and sales in which there is chance or risk (Gharar).” [Sahih Muslim]
“Gharar is chance or risk, meaning it is not known whether it will come to be or not, such as selling fish in the water, transactions of unknown things, the particulars of which are not fully comprehended by the buyer and seller.”
Insurance fails on both points stated above. Therefore, as a conclusion, an insurance contract is not a valid one according to Islamic laws.
DISCLAMIER: Only Allah knows the best; this is my limited understanding of this vast subject. Please correct me if I have made any mistake.
I have only touched upon some of the key points. For detailed understanding of the subject, please contact a respected scholar.