All transactions are allowed (halal) except those transactions which have been prohibited. One type of prohibited transaction is the transaction in which there is gharar. Gharar is unknown uncertainty. One example of gharar is selling something in a box while the buyer is unaware of what is in the box. Another example of gharar is when you pay an amount based on the possibility that a certain occurrence will come to pass. 

There are different types of insurance. In basic terms insurance is where you pay a certain amount to the insurance company who will then cover you in the event of a loss which may or may not happen. Insurance is made up of four main components:

1.       The policy. This is the contractual agreement between you and the insurer. It defines exactly what the insurer will cover.

2.       The premium. This is the periodic cost that the insurer charges you. You have to pay the premium irrespective of any losses or claims that you may have.

3.       Policy limit. This is the maximum an insurer will pay for a particular loss depending on the agreement you have with the insurer

4.       The claim. This is asking for compensation from the insurer

Insurance is considered to be a transaction which is prohibited as it includes at least one prohibited aspect within it. The prohibitions found in insurance may include:

1.       Riba

2.       Gharar

3.       Maysir (gambling)

Many still take out insurance despite the fact that established Islamic scholarship has come to the conclusion that insurance is haram. The reason for not avoiding insurance may be one of the following:

1.       Necessity. Certain situations may necessitate doing an act which is generally haram. Precisely when insurance becomes a necessity isn’t clearly defined and is something that should be determined in conjunction with someone who is knowledgeable about both Islamic law and your situation.

2.       Insurance is halal. Conventional insurance is a modern product and there is no explicit text from the Qur’an or the sayings of The Beloved ﷺ regarding each and every iteration of conventional insurance. Instead, there are general guidelines. Based on these general guidelines Islamic scholars have used their juristic ability to come to conclusions regarding its permissibility or impermissibility. Inevitably this leads to the potential for legitimate differences of opinions to arise within Islamic scholarship. There are those who follow the contrarian opinion that insurance is halal.

3.       Takaful. Takaful is sometimes referred to as “halal insurance”, “cooperative insurance” or “shared liability”. Technically takaful is not insurance as understood in the conventional sense. Takaful has existed for millennia, however, the modern iteration of takaful is a financial product which Islamic scholars have developed in conjunction with finance professionals as a substitute for conventional insurance. In takaful members contribute to a pool with the understanding that this fund will be used for the mutual benefit of the group should any unfortunate circumstance arise. Unlike conventional insurance it is based on the concept of cooperation.

Allah knows best