Fundamentals of Insurance and Takaful
You buy insurance to transfer the risk of loss to the insurance company and thereby reduce your financial hardship when you suffer the loss. For example, if your insured motor vehicle is involved in an accident, your insurance company will pay for the cost of repair. You buy insurance by paying a premium to your insurance company.
What is takaful?
Takaful is an insurance scheme based on Islamic principles of joint guarantee, where a group of participants agrees to mutually guarantee among themselves against a defined loss. If you join a takaful scheme, you agree to donate a certain portion of the contribution into a takaful fund to assist any member of the fund who has suffered any defined loss. Depending on the terms of the takaful certificate, a participant may also be able to share in the surplus of a takaful fund if he has not made a claim during the period of takaful. Anyone can join a takaful scheme regardless of his religious beliefs.Why buy insurance or join a takaful scheme?
The purpose of having insurance/ takaful is to reduce your financial burden when you suffer from losses or mishap so that there is minimal disruption to you and your family’s daily activities. However, an insurance/ takaful plan only covers you for losses specified in the plan. Therefore, if you are getting any insurance/ takaful, make sure it covers the losses you need to protect.What type of insurance/ takaful products do I need?
Your insurance/ takaful needs depend on your personal situation, age and lifestyle. However, certain types of insurance/ takaful are required by law, e.g. if you own a motor vehicle, the law requires you to have a cover to pay for liability caused by you to others.What are the types of insurance/ takaful products available?
You can get different types of insurance/ takaful to cover things you own, your life, your health and for your retirement. You can find many types of products that can meet your needs. The common types of insurance/ takaful products are:- Life insurance/family takaful, which is usually used as a means to provide financial aid for your dependants if you die. You may also save or invest through life insurance/ family takaful. Some life insurance/ family takaful products also pay out when you are unable to work due to illness or disability. Examples of life insurance/ takaful products are whole life/endowment, ordinary family and investment-linked.
- Motor insurance/ takaful, which pays for specific losses due to damage to your motor vehicle involved in an accident. It also pays for losses that your motor vehicle caused to others in an accident.
- Houseowner insurance/householder takaful, which pays for specific losses when your home or your personal assets are damaged due to events like fire, flood, burst pipes, etc. You may also get protection against claims made by third parties arising from these events.
- Medical and health insurance/ takaful, which pays for various types of hospitalisation and medical expenses that you may incur if you become ill or injured. These include payments for hospital room and board, professional fees, medical supplies and medical services.
- Personal accident insurance/ takaful, which pays a sum of money if you become disabled due to an accident or if you die
Shariah Committees have been set up by all takaful operators to ensure that their takaful operations are in line with the Shariah. Bank Negara Malaysia has also set up a Shariah Advisory Council which acts as a reference point for matters relating to Islamic banking and takaful in Malaysia.
Insurance/ takaful principles
Your insurance and takaful products are subject to four main principles which are observed universally, that is, insurable interest/ permissible takaful interest, utmost good faith, indemnity and contribution.To get an insurance protection, you need to have an insurable interest in the item or life to be insured. Insurable interest is normally present by way of relationship or ownership. For example, a person will have insurable interest in his own or child’s life, house or motor vehicle.
On the same basis, in takaful, you need to have permissible takaful interest before you can join a takaful scheme. An insurance/ takaful plan without insurable interest/ permissible takaful interest is like a gambling contract where the purpose of having insurance/ takaful is to profit from it.
Utmost good faith means you need to state all the material facts when you are buying a policy or joining a takaful scheme. The purpose is to allow your insurance company/ takaful operator to decide whether it should provide the insurance or the takaful cover to you, and the amount of premium or takaful contribution that it should collect from you.
If you do not observe this requirement, your insurance policy/ takaful certificate can become invalid and your insurance company/ takaful operator can refuse to pay a claim made by you.
Indemnity and contribution only apply to insurance/ takaful taken on your belongings. When you incur a loss, the rule of indemnity will only allow you to get an amount that will return you to the position you were in before the loss. Under the contribution rule, all insurance companies/ takaful operators providing cover to a property will share in the damages of the said property. In this way, a person cannot “profit” by having more than one policy or takaful plan on the same item.
If you do not observe this requirement, your insurance policy/ takaful certificate can become invalid and your insurance company/ takaful operator can refuse to pay a claim made by you. Indemnity and contribution only apply to insurance/ takaful taken on your belongings. When you incur a loss, the rule of indemnity will only allow you to get an amount that will return you to the position you were in before the loss. Under the contribution rule, all insurance companies/ takaful operators providing cover to a property will share in the damages of the said property. In this way, a person cannot “profit” by having more than one policy or takaful plan on the same item.
Where can I get an insurance/ takaful plan?
- Directly from insurance companies or takaful operators respectively
- Through registered agents, financial advisers orlicensed brokers; and
- Through banking institutions habing bancassurance arrangements with insurance companies or bancatakaful arrangements with takaful operators, respectively.
An insurance or takaful agent acts for an insurance company or takaful operator and sells insurance policies or takaful plans issued by the insurance company or takaful operator only. An insurance or takaful broker acts for the customer and advises customer on the plan that he may need. A financial adviser is an independent party that offers a variety of financial planning services, including insurance/ takaful to his customer.
Shop around
It pays to shop around for a plan that meets your needs. You can compare premiums, terms and details of exactly what is covered in the plan and what is excluded. Different policies may have different terms and conditions, rates and exclusion clauses. Get an explanation if you do not understand any term so that you are fully aware of what you are getting into.What is a material fact?
A material fact is any fact relating to you or the object to be covered that the insurance company/ takaful operator should know so that it can make a decision on whether it should grant you the cover, the amount of premiums you need to pay and the terms to be applied. The insurance company/ takaful operator will normally get these facts from the application form. As such, if you are not sure of any questions in the application form, you should get an explanation and not guess or leave the item blank. In life insurance/ family takaful, facts commonly deemed as material include occupation, financial status, family medical history, state of health and lifestyle.Paying premium/ contribution
When you pay your premium/ contribution, make sure that your cheque is issued to your insurance company/ takaful operator if you pay through an agent. Otherwise, try to pay your premium directly to the insurance company/ takaful operator. There are many ways you can pay your premium/ contributions such as autodebit from your bank account, via Internet banking, credit card and using telephone banking.You should ask for a receipt for the premiums/ contributions paid and contact your insurance company/ takaful operator if you have not received the policy within one month after the purchase.