Why is life insurance haram in Islam?
The system: the insured pays regular premiums to the company; the company promises that on death or at the fixed term it will give the heirs / him a large sum — the sum may be many times more than the premiums paid, or less.
The system: the insured pays regular premiums to the company; the company promises that on death or at the fixed term it will give the heirs / him a large sum — the sum may be many times more than the premiums paid, or less.
1. Gharar (uncertainty): uncertainty — how much will be received, when it will be received, whether it will be received at all, is unknown to both parties; the Prophet ﷺ forbade transactions involving gharar (Sahih Muslim).
2. Qimar (gambling): on an early death the heirs get many times more, on a long life less — profit/loss dependent on chance, resembling gambling: ﴿إِنَّمَا الْخَمْرُ وَالْمَيْسِرُ وَالْأَنْصَابُ وَالْأَزْلَامُ رِجْسٌ مِنْ عَمَلِ الشَّيْطَانِ فَاجْتَنِبُوهُ﴾ (Indeed, wine, gambling, idols and divining arrows are filth from the work of Satan, so avoid it) (Surah al-Ma'idah: 90).
3. Riba (interest): companies invest the collected money mostly in interest-based business; the fine on late premiums and the interest on a policy loan are also riba: ﴿وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا﴾ (Allah has permitted trade and forbidden riba) (Surah al-Baqarah: 275).
4. Lack of tawakkul: relying on a company for the family's maintenance after death is against tawakkul (trust in Allah); what is required is halal earning, saving, and trust in Allah.
5. Violation of inheritance: the whole sum goes to the nominated person — against the fixed shares of Islamic inheritance; the heirs' rights are affected.
Summary: the system is based on gharar, gambling and riba — it is haram. The alternatives: saving, halal investment, tawakkul.
Translated from the original Urdu fatwa.