Differences in Sharia vs Conventional Life Insurance, Which is Better?

Sharia Life Insurance

Sharia life insurance is different from conventional insurance. What's the difference and what are the benefits for customers? Sharia life insurance is a financial product that serves to provide sum assured if the insured dies. The thing that distinguishes this product from conventional life insurance is that its management is based on the principles of Islamic law. Basically, this product is based on a mutual cooperation agreement, so that each insurance participant will help each other if someone faces a disaster. Here are the differences between Islamic and conventional life insurance. 

1. Grant Contract 

The first thing that distinguishes Islamic life insurance from conventional is the contract. In sharia insurance, the contract or contract is in the form of a grant contract (commonly referred to as a tabarru contract). That is, the agreement is based on the principle of mutual assistance to bear the risk of insurance participants who are affected by a disaster. The concept is called risk sharing, not risk transfer as in conventional insurance. This mechanism is in accordance with Islamic law which recommends mutual help activities between people. When compared to conventional insurance, the cost of sharia insurance contributions is more affordable. The reason is that the fees charged by the company are only management fees and the like, there are no acquisition costs. 

2. Mutual Fund Ownership System 

The mechanism of sharia insurance is usury-free, because the funds collected by customers will be collected and become joint property rights (tabarru' funds). This concept is similar to gotong royong to raise social funds. The money will later be used for participants who are affected by disasters and need assistance. For the money collected under the mudharabah contract, the insurance manager will invest it in a halal business and the proceeds will be divided based on a profit-sharing system. In conventional insurance, the ownership of funds is held by the insurance company. So, the customer pays the premium and the premium belongs to the company. Instead, the customer is entitled to receive sum assured from the company in the event of a risk of death. Ownership of funds in conventional becomes the property of every insurance participant. The insurance company will only charge a management fee and are not entitled to the tabarru' funds deposited. 

3. Underwriting Surplus Shared Together 

Since the ownership of the deposited tabarru funds belongs to all insurance participants, if there is an underwriting surplus it will be distributed to each customer. For information, the underwriting surplus is the difference between the collected tabarru' funds minus the payment of risk compensation, reinsurance, and technical reserves for a certain period. In conventional insurance, the underwriting surplus will belong to the company. Not shared with insurance participants. 

4. Allocation of investment funds in the halal field 

Generally, insurance companies will invest the collected funds in order to grow. Conventional insurance invests in various instruments, such as stocks, bonds or the money market. Well, sharia insurance will only invest taboo funds in halal businesses and avoid haram businesses. In sharia insurance, customers will get detailed fund management details. This transparency system is in accordance with Islamic rules which require that every agreement be clear and not vague. The profit sharing agreement will also be explained clearly at the beginning before you sign the insurance contract. 

5. Supervised by Sharia Supervisory 

Board In operation, each sharia insurance product will be supervised by the Sharia Supervisory Board (DPS). DPS is an institution that functions to supervise financial products in order to remain in accordance with sharia principles. Sharia vs Conventional Life Insurance Summary Life insurance Sharia Life Insurance Conventional Grant Agreement (Tabarru) Insurance Policy Ownership Shared Fund in Company Owned Tabarru Fund Insurance Instrument Conventional Sharia Investment Supervision of the Sharia Board of Commissioners

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