Insurance is a sort of contract for mutual help in which people pay a fixed amount in installments. The purpose is that if any of them is inflicted with losses relating to their persons or their wealth they are compensated from this pooled money in a prescribed manner. The money given is never returned and all the people or institutes which provide this service are granted this right by people who enter into this contract of mutual help with them that in return for this service they can spend the accumulated money in whatever way they want.
This is an extraordinary scheme which has been chalked out to compensate losses and to help people in difficult circumstances. Its benefits are now acknowledged everywhere. After the termination of the institutions of tribes, fraternities and 'aqilah, this is the best substitute for them which contemporary economic systems have provided to this world. There seems to be no objection against it; however, Islamic scholars generally regard it to be prohibited. Following are the objections they have raised against insurance:
1. The amounts which insurance companies pay to their clients are generally more than the installments their clients have paid them; this is interest and interest is forbidden in Islam. Moreover, insurance companies further invest this money in interest-based schemes. Some part of the interest earned by them is also used in paying off their clients who had bought their insurance policies.
2. Insurance policy holders repeatedly receive large sums of money against death, accidents or losses. This is gambling which is prohibited in the Islamic shari'ah.
3. The entity for which an insurance policy is purchased does not typically exist; the locus of the contract is also not ascertained and the policy holders do not even know the number of installments and the time until which they will have to pay them. In the terminology of the jurists these are called gharar (deception), jahalah (ignorance) and ghaban (embezzlement) respectively in the presence of which no contract is allowable. The Prophet (sws) has forbidden such deals.
A little deliberation will show that all these three objections are baseless.
The first of these is not tenable because the installments paid by an insurance policy holder are not loans. They are given by him for the help and support of others on the condition that he too could be the recipient. Thus they are never returned. If insurance institutions invest the amonts in interest-bearing transactions, it is because they have been given the right by the policy holders to use them. No responsibility of the nature of this use rests on the policy holders. If a person is to receive insurance money for the purpose he had bought a policy, then as per the contract, he receives it from the accumulated amount. This is the real nature of insurance, and it must be viewed on its basis.
The second of these objections is not tenable because gambling is a game and a matter of purely chancing one's luck. People who buy insurance policies do so to become part of a system which caters to helping one another in case of losses. The nature of the two is entirely different, and the basis of religious directives is not marginal similarity between two things; it is and should be based on the actual nature of the two.
The third of these objections is not tenable because the directives of the Prophet (sws) related to gharar (deception), jahalah (ignorance) and ghaban (embezzlement) are not of the nature of an absolute prohibition: they are meant to resolve disputes and to close the door to ways which may result in these evils in cases of financial transactions. Insurance, however, is not a financial transaction. It is a scheme which relates to mutual help. It is executed and managed by individuals and institutions that are given the right to use the accumulated money in return for the service they provide. It is not appropriate at all to judge it by ignoring the nature of this scheme.
(Translated by Dr Shehzad Saleem)