Does insurance contain interest?

QuestionsCategory: FinanceDoes insurance contain interest?
Adam asked 2 months ago

As salamu alaykum,
I’m enquiring about insurance, I’m aware that insurance is forbidden because it is basically gambling, however I have heard some scholars say that there is insurance involved because you are exchanging money for money.
Could you please advise me if there is any riba in this contract?
From my understanding all I can see is gambling because I am essentially betting with the insurance Company because I’m paying a fee and if a certain thing happens ( example- car gets stolen) they will then pay me x amount.

1 Answers
Mufti Wahaaj Staff answered 2 months ago

بسم الله الرحمٰن الرحيم

الجواب حامداً ومصلياً

As-salāmu ʿalaykum wa-raḥmatullāhi wa-barakātuh.

When scholars say that there is interest and gambling involved in insurance, they mean that there are elements of both in it. In a standard life insurance policy:

  • A person may pay premiums for years and receive nothing in return.
  • A person may pay a small amount in premiums and receive a sum that is hundreds of times more than their contribution.

Both of these scenarios fit the definition of gambling. The second scenario also fits the Islamic definition of ribā (interest). This is because the premiums that are paid are not in exchange of anything tangible. The only thing that may be received is money.

In the case that the policy holder dies, the money will be paid out and any amount in excess of what the policy holder paid will be interest. For example, if, before the policy holder’s death, he paid $1,000, and his beneficiaries are paid $100,000, it is permissible to keep $1,000. The remaining $99,000 would be interest money.

Please note, insurance policies need to be evaluated on a case-by-case basis. A blanket statement such as “insurance is ḥarām” should not be made. There are many types of insurance, and though they may carry the name insurance, the actual substance of the contract may not meet the Islāmic definitions of gambling and interest.

واالله تعالى أعلم وعلمه أتم وبه التوفيق
And Allāh Taʿālā Knows Best

Muftī Mohammed Wahaajuddin bin Salauddin
(May Allāh forgive him and his parents)