Malaysia’s insurance industry is growing faster than ever, with statistics showing a 10% increase in general insurance in 2022. Increased health awareness, medical inflation, a booming motor industry, growing industrial and commercial property markets, and increased natural disaster awareness drive the industry’s growth. To respond to the ever-growing insurance market, Malaysian insurers provide protection via conventional and Islamic insurance or Takaful if a loss occurs.

So, what is the key difference between a conventional insurance provider and a Takaful plan? The main difference between Takaful and conventional insurance is that although they have the same objective of cushioning Malaysians against financial loss, Takaful is a Shariah-compliant insurance option.

Islamic law considers undue interest haram alongside prohibited elements like gambling (Maisir) and uncertainty (Gharar). Therefore, the insured in a Takaful contract enters a profit-sharing venture with the insurer. Also, the Takaful industry exclusively covers shariah-compliant products.

It’s almost four decades since Malaysian government laws instituted the takaful industry to complement Islamic banking, offering an interest-free loan plan. Even so, while takaful companies are Shariah-compliant, it is not a religious product, meaning Malaysians of any religious background can become takaful plan holders. Keep reading this Takaful vs conventional insurance comparative guide to decide whether a takaful operator is right for you or you’d instead become a conventional insurance policyholder.

Section 1: Understanding Takaful and Conventional Insurance

Subsection 1.1: What is Takaful?

Takaful is a Shariah-compliant insurance avenue based on a pool system whereby certificate holders or takaful participants contribute to a takaful fund to benefit from mutual financial aid against a defined loss. It stems from the Islamic principles of mutual assistance and donations. Takaful participants adhere to the principle of Tabaruu, where they agree to relinquish a part of their contributions as a donation to a fellow takaful participant who may experience the defined loss.

The history of takaful insurance in Malaysia dates back to the 1980s. It rose from the demand for a Shariah-compliant insurer because conventional insurance companies contravened the three elements that guide commercial factors or Shariah-compliant business contracts.

Malaysian takaful products fall into two categories: general takaful and family takaful. While specific product names may vary across brands, general takaful protects the insurer from losses due to fire, accidents, property loss/damage, and liability to a third party.

In contrast, family takaful products provide the takaful participant’s family with financial security in case of death, critical illness, or permanent disability. Moreover, a portion of the contributions in family takaful goes towards savings or long-term goals like education.

Subsection 1.2: What is Conventional Insurance?

Conventional insurance is a risk-management avenue whereby the insured or insurance policyholder transfers risk to an insurer in exchange for premiums paid. The insurance policy by a conventional insurance company must feature a specified event/potential loss, an agreed premium, and a total claim amount in case the specified loss occurs. Also, the policyholder should have an ownership interest in the object receiving risk protection.

The main difference between a standard insurance policy and takaful insurance is that the former entails risk transference while the latter builds on mutual assistance and joint guarantee. Also, while the insurer earns interest in a conventional insurance policy, a takaful operator shares profits among takaful participants, meaning a takaful participant can enjoy some profit before the coverage period ends. Whether you become a takaful or conventional insurance policyholder, insurance is a responsible financial plan.

Section 2: Takaful vs Conventional Insurance: A Comprehensive Comparison

Subsection 2.1: The Main Differences

• At first glance, conventional insurance companies and Takaful operators appear similar because they cushion the insured against financial crises through insurance products like
  • Critical illness protection
  • Travel Insurance
  • Health coverage
  • Property protection
  • Life insurance and more

 

• The insured party or policyholder receives funds as compensation should a specified event occur within the coverage period. Also, conventional insurance companies and the takaful provider are legal entities under Malaysian government laws.
  However, as highlighted above, unlike conventional insurance, Takaful insurance is a Shariah-compliant insurance option based on commercial factors or Islamic Muamalat (Islamic transaction principles) stipulated under Shariah laws. Islamic Mualmalat prohibits three elements present in conventional insurance:
  • Riba (interest)
  • Al-maisir (gambling)
  • Gharar (uncertainty/ probability)

 

• As an Islamic principle, Takaful builds on mutual cooperation whereby the participants in a takaful plan collectively contribute to a Takaful fund under a takaful provider. Therefore, Takaful plan holders accept a shared risk and offer each other a joint guarantee to bear the risk of financial loss through mutual assistance.
  Given that riba or interest contravenes Shariah laws, Takaful complies with Islamic Muamalat by generating profit rather than interest. Takaful agents can utilize the funds in a takaful fund to make extra money from investment channels that do not embody Gharar or Al-maisir. Such include Shariah-compliant funds.
  Unlike in a conventional insurance company, where the extra money or profits belong to shareholders, the policyholders in a takaful retain an ownership interest in the fund and, as such, share profits. Therefore, besides facilitating mutual financial aid, a takaful fund generates or can derive investment income through Sharia-compliant funds.

Subsection 2.2: Similarities and Contrasts

Both takaful and conventional insurance protect the insured from a specified risk, feature products protected by the Malaysian government under Perbadanan Insurans Deposit Malaysia (PIDM), and serve Muslims and non-Muslims. However, they have the following differences:

• Takaful providers offer more transparency by informing all parties to a Takaful contract where their money goes, while conventional insurers use the premiums at their discretion.

 

• Profit-sharing allows takaful participants to enjoy profits before the coverage period lapses, while conventional insurance policyholders only get the claims in the event of a loss.

 

• Takaful operators have a no-claim cashback policy and pay a percentage of the funds in the pool to a takaful participant if the coverage period lapses before they make a claim. Conventional insurance lacks this provision.

 

• Takaful plans include an investment option for savings, while conventional insurance policyholders must purchase expensive add-ons to enjoy the investment option.

 

• The conventional insurers bear both the risk and rewards, providing protection for the insured.

 

• Unlike Takaful products, claims fulfillment is independent of the funds’ pool health. Therefore, the conventional insurer must tap into their reserves should the claim amount

Subsection 2.3: Costs and Expenses

The price perception of the difference between Takaful contributions and conventional life insurance premiums lies solely with the consumer. However, takaful operators generally charge their products competitively.

Besides competitive monthly donations, the investment function and profit sharing in Takaful insurance may create the perception that a Takaful operator charges more affordable contributions than conventional monthly premiums.

Nonetheless, the best way to establish insurance affordability is by comparing the products across different insurers. Besides the premiums and monthly contributions, compare Takaful Wakalah or Mudarabah fees, which are the Islamic insurance equivalents to administrative or service fees.

Subsection 2.4: Non-Muslims and Takaful

Although takaful is a Shariah-compliant concept created to allow Muslims to conduct insurance transactions according to Islamic law, it is not an exclusive religious product. Therefore, non-Muslims can become takaful participants and benefit from takaful products.

Section 3: Benefits and Challenges

Subsection 3.1: Benefits of Takaful

As highlighted above, the benefits of Takaful to a Takaful participant include:

• Transparency

 

• Profit sharing

 

• No-claim cashback

 

• Savings via the investment function

Besides individual-specific benefits, the takaful industry benefits Malaysia’s economic growth. Once channeled into Shariah-compliant funds, the funds pooled by takaful participants spur economic growth through savings, investments, and income generation.

Subsection 3.2: Challenges and Criticisms

On the one hand, the takaful industry’s primary function is providing protection via Shariah-compliant insurance services. Nonetheless, critics argue that Takaful is not entirely Shariah-compliant due to the implementation of Wakalah and Mudabarah in its implementation.

Second, despite consistent growth in the Takaful industry, statistics show that Malaysia’s conventional insurers perform better based on profitability and risk measurement. Regardless, Takaful remains a formidable force in Malaysia’s coverage industry.

Section 4: Practical Insights

Subsection 4.1: Takaful for Homeowners and Other Specific Needs

Malaysia’s takaful operators offer comprehensive products to meet diverse user needs, as mentioned below:-

• Takaful plans for homeowners offering Shariah-compliant protection for physical residences and household belongings against damage and loss to theft, fire, and other hazards.

 

• Life takaful plans that include an investment option alongside death benefits.

 

• Family takaful covering, health, children’s education, Badal Hajj, permanent disability, among other riders.

 

• Motor takaful coverage against accidents, auto theft, damage, and third-party liability. Moreover, the package may include add-ons like roadside assistance.

 

• Group takaful for employers to their employees.

 

• Health takaful, like Takaful MyClick Medicare, provides reimbursement for hospitalization, surgery, and other therapies. Moreover, you may choose a stand-alone health takaful or bundle it with ride-ons.

 
Travel takaful for protection against flight delays, baggage loss, and health emergencies during local and international travel.

Subsection 4.2: Choosing Between Takaful and Conventional Insurance

The benefits of takaful and conventional insurance highlighted above should help you choose a plan suited to your preferences. Besides the individual category benefits, follow the tips below when choosing takaful or conventional insurance.

• Ensure you are dealing with a registered entity. Also, conduct due diligence to establish the insurer’s reputation.

 

• Establish the coverage level a policy offers.

 

• Examine premiums, contribution costs, and additional fees to ensure you can afford the plan.

 

• Read and understand the policy before signing the contract.