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While takaful is primarily a halal method for practicing insurance, it does offer major investment benefits for participants and investors alike.
conventional insurance companies do invest the premiums paid by the customers, but the beneficiaries of those investments are primarily the company.
While they do offer investment and savings mechanisms, these are usually packaged as add-ons that are often very expensive.
A takaful, on the other hand, itself is structured as an investment vehicle, where the customer is not only paying to receive an insurance offering,
but is also a participating investor. So, what are the benefits of investing in a takaful? How does one invest in a takaful?
Read more about: Conventional Insurance vs. Islamic Insurance
In addition to providing insurance in case of an adverse outcome and potentially donating to charity premiums that haven’t been given out as claims, takaful offers benefits that are purely from an investment standpoint. These include:
Embedded in the core concept of a takaful is the idea of sharing risk. As such, participants in a takaful do not have to take on the financial burden of an investment failing on their own. All participants in the takaful assume the risk, so the pain of a loss is distributed over a wider pool.
For Muslims looking to ensure that their investment meet halal standards, takaful offer an easy method to ensure Shariah-compliant returns.
As with other Islamic investment vehicles, takaful are forbidden from investing in activities that are haram, including alcohol, gambling, drugs, and interest-bearing finance (riba).
Read more about: Halal Investing
By virtue of being Shariah-compliant, takaful (as well as other forms of halal investing) are inherently less risky. For one, no shariah-compliant investment would take on interest-bearing debt, which could multiply losses.
Furthermore, under the principle of gharar, takaful and other shariah-compliant vehicles are forbidden from investing in products or assets that are overly speculative, making them safer on the whole. As such they offer a compelling investment strategy not only for Muslims, but for non-Muslim investors as (non-Muslims are allowed to participate in a takaful).
As with risk sharing, profit sharing is another core concept of a takaful. All returns and profits are divided among the participants who pay premiums into the takaful.
As with other types of investment funds, takaful that operate on sound investment principles will likely diversify their investments across different asset classes as both a hedge – giving it an added layer of risk minimization – and to lock in potential returns from some of the portfolio’s assets. Some common Shariah-compliant assets and investment strategies include:
- Sukuk
- Equities
- Real Estate and iREITs
- Islamic mutual funds
- Wakala and Mudarabah Investments
Takaful are an excellent way to earn passive income, as an investor isn’t required to take an active role or have any experience in monitoring and reacting to the market.
A takaful’s investments are usually run by an experienced investment manager. This is ideal for the average retail investor who wants to simply park their money and await their returns.
Takaful investments are usually set for a duration of time. If the duration of the takaful’s investment proposition is long enough, it could potentially provide a good way for a participant to compound the returns on their investment.
The best way to go about choosing the takaful is through a takaful investment-linked plans. These plans combine the insurance offering with a particular investment plan that suits the participant, paying them from the dividends on that specific investment plan.
Investing in these plans is usually pretty simple and does not require a large sum of money. Some plans, however, may require a minimum investment to participate.
Next, the participant must decide on the contribution payment plan. This can be monthly, quarterly or annually.
The contribution will be divided into three figures:
1-The tabarru
The tabarru is the takaful’s common pool fund that will go towards paying out claims for the participants. If the pool’s total tabaru fund isn’t paid out, then the proceeds will be donated to charity. A contributor may not withdraw their funds from this pool.
2-The wakallah
Wakallah is simply the fees that go towards the takaful’s operator.
3-The actual investment.
What remains will be invested according to the participant’s plan. Depending on the plan, these funds can be subject to a lock-up period and can only be withdrawn once certain conditions are met
Some plans may include a minimum withdrawal amount and a certain balance to be maintained in the investment account.
Disclamer:
"The post is for educational purposes only and the Firm does not directly or indirectly provide these services. Funding Souq KSA is regulated by the Saudi Central Bank (SAMA). This communication is not directed at or intended to be acted upon by any Person in the DIFC."
