Differences between family takaful & conventional life insurance

31 March 2023 | Kuala Lumpur

The concept of insurance can be confusing and overwhelming, especially when it comes to understanding the differences between family takaful and conventional life insurance. In this article, we will explore what sets these two apart. This could help you make an informed decision about which type is best for your needs. We'll discuss how each plan works, their benefits and drawbacks, and more. By the end of this article, you should have a better idea of which option is right for you.

Both family takaful and conventional life insurance offer financial protection for your loved ones in the event of your demise, but what are the key differences between the two?

What is family takaful?

Family takaful is a Shariah or Islamic law compatible coverage that is based on the principles of mutual assistance and risk sharing. “Takaful”, derived from the Arabic word “kafalah” means to guarantee or look out for one’s needs. In the occurrence of unexpected event upon the Takaful participants, the financial aid will be taken from the Takaful fund donated by the participants based on the concept of “Tabarru’” which means donation.

What is conventional life insurance?

Conventional life insurance works by providing a death benefit in exchange for paying the premium. Thus, the risk is transferred from an individual to the conventional insurance provider.

Understanding the different financial benefits provided by each option

There are many benefits that come with takaful (Islamic insurance) compared to conventional insurance. Some of these benefits include:

  • Takaful is based on the principles of cooperation and sharing, with the idea of offering participants financial support in the event of disaster based on mutual aid, brotherhood, and solidarity. This means that in takaful, participants help each other out in times of need.
  • Takaful is based on the principles of Shariah, while conventional insurance is not. This means that takaful complies with Islamic law, while conventional insurance does not have to.
  • Although based on Islamic Shariah law, takaful is not a religious product. This means that anyone regardless of religious belief, can participate in a takaful plan.
  • Takaful is a form of investment, whereas conventional insurance is not. This means that your money grows over time in takaful, while in conventional insurance, your money is simply used to pay for future claims.
  • Takaful provider provide a no claim cash back policy. Although we want to be protected from any misfortune, we almost wish to never have to claim it. Fortunately, takaful providers will refund a set amount of money if you don't file any claims throughout the coverage term. However, there is no predetermined amount to abide by; the Takaful provider determines the amount.
  • Takaful operators abide by transparency, while conventional insurance does not have to. This means that all participants in a takaful plan know exactly where their money is going and how it is being used. In contrast, policyholders in a conventional insurance plan may not be aware of how their money is being used.
  • In Malaysia, both takaful and insurance products are protected by the government of Malaysia through PIDM, automatically.

Exploring the risks and rewards offered by both plans

The main difference is that the participants (members) of family takaful plan share the risks and rewards together, whereas in conventional life insurance, the insurer shoulders all the risks and rewards.

In family takaful, participants contribute monthly or yearly contributions to a common pool. The pool is then used to pay for valid claims made by participants. Any surplus in the pool is shared among the participants, while any pay-outs are also subject to the financial health of the pool.

Contrastingly, for life insurance, claims are paid out by the insurance company itself, so pay-outs are guaranteed as long as the premiums are paid which means the insurer will bear both the risks and rewards. Should there be more claims than expected, the insurer must cover them from its own reserves.

Another key difference is that family takaful is often structured as an investment product, while traditional life insurance is not. This means that with family takaful, you not only have protection against death or critical illness, but you can also grow your money over time. With traditional life insurance, the death benefit is the only pay-out you will receive.

So, which one is right for you? It really depends on your needs and preferences. If you're looking for guaranteed pay-outs and want the potential to grow your money over time, then family takaful may be a good option for you. Here’s a list of takaful and conventional insurance providers in Malaysia for you to refer to.

Summary of differences between takaful and conventional insurance

Takaful Conventional Insurance
Operates based on cooperation and sharing Operates based on commercial factors of the organisation
Abide by Shariah laws & government laws Abide by government laws
Takaful contributions and shareholder capitals must be invested in Shariah compliant investments only Premiums and capitals can be invested in any investment channel, and it is not necessary to be Shariah compliant
Free from elements that may be considered Riba (interest), Gharar (uncertainty), and Maysir (gambling) May have risk of investing in elements of interest, gambling, and uncertainty
Risk is shared and distributed among takaful participants who jointly agree to bear this risk Risk is borne by the conventional insurance provider instead of the insured individuals
Low claim rates: Results in profit sharing between participating members and shareholders Low claim rates: Profits and money belong to shareholders and the insurance company

In conclusion, family takaful and conventional life insurance are both important financial tools for protecting your loved ones in the event of an unexpected death. While they have some similarities, there are also several key differences between them that should be taken into consideration when deciding which type of policy is best suited to meet your needs. Ultimately, it's up to you to decide which option provides the most comprehensive coverage at a price point that fits within your budget.

Get a peace of mind

Life insurance or family takaful plans are essential to ensuring that your loved ones are financially supported in the event of your death.

WithFWD Protect Direct, our family takaful plan ensures that your loved ones' futures are protected from life's curveballs from as low as RM11.17/month. The plan comes with a death benefit of up to RM500,000 which will be paid to your beneficiaries. The lump sum pay-out can be used to cover funeral expenses, support the living expenses of your loved ones while they get back on their feet, clear outstanding debts, or liabilities that you may have, and more.

The plan also comes with a waiver of contribution benefit, which means that your family’s contribution will continue to be paid for upon your death. This ensures that they remain covered in your absence. You can opt to participate in the term plan as an individual or cover up to 4 family members in one plan.