Fatwa No : 81903
The Shariah Ruling on Insurance

The Shariah Ruling on Insurance

Assalamu Alaikum wa Rahmatullahi wa Barakatuh!
The request is to kindly provide detailed information and Islamic rulings regarding insurance schemes (insurance policies) from an Islamic perspective, along with relevant fatwas.
1. What is the Islamic perspective (according to the Hanafi school of thought) on insurance? 2. Is it permissible to take out an educational policy for children's education? 3. If a company offers an educational policy in which it does not charge a fixed premium for a specific time but instead charges a different amount each year and provides a profit in the form of units (i.e., they invest the money in business and return a variable profit), (is such a scheme permissible?)
4. If insurance is completely impermissible, then can a person who has already taken an insurance policy and now wishes to cancel it, take back the amount he has paid so far and use it?
Kindly mention the name of any book that contains complete information on this topic, and please provide a detailed answer.

الجوابُ حامِدا ًو مُصلیِّا ً

1.From an Islamic point of view, insurance is essentially a form of interest-based (riba) business, similar in nature to banking transactions. The difference between them is only in form; in reality, there is no difference. Moreover, elements of gambling (qimar) and speculation (gharar) are also found in insurance contracts. Those who understand the true nature of insurance know that it involves two forms of riba (usury) as defined by Shariah: First, the insurance company collects premiums from policyholders and then lends this money to those in need on an interest basis. Second, the company gives policyholders a return over and above the total amount of their paid premiums, which is considered riba (interest) under Islamic law. This is because the amount deposited by the policyholder in the form of premiums is treated as a debt (dayn), and any profit over that debt—whether predetermined or commonly understood—is considered riba. The prohibition of such riba is established through the Qur’an, Hadith, and consensus (ijma‘) of the Ummah.
(Reference: “Bīma-e-Zindagi” [Life Insurance], p. 54)
2. Obtaining an educational insurance policy is also not permissible according to Islamic law.
3. If it is conducted in accordance with the Shar‘i rules of Muḍārabah (Islamic partnership), then there is room for permissibility. However, in most cases, these rules are not observed, and the elements of interest (riba) and gambling (qimār) are also present, due to which it is not permissible.
4. Yes! It is definitely permissible to take back and use the original capital that you have invested.