Life insurance and its working

Life insurance becomes necessary in this Era because the death ratio in this global world increases with time. Sometimes it happens because of accidents, and sometimes it’s very sudden that families left behind are in great shock that they Need financial and moral support at the same time. Even Islam also teaches us to take Precautionary measures to look after our family even after we die.

What is Life Insurance?

A contract with an insurance company is known as Life insurance.

In exchange for premium payments, the insurance company issues a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death.

Why should you buy Life Insurance?

Parents with small children :

If a parent dies, the loss of their caregiving skills could create a financial gap for their children.

Life insurance ensures that the kids will have the financial resources they need until they can support themselves.

Adults who own property together – Life insurance must be a good idea if an adult is Married or not, and if the death of one adult would mean that the other Person could no longer afford loan premiums and taxes on the property.

Wealthy families who expect to owe estate taxes – Life insurance can provide funds to cover the taxes and keep the estate’s full value intact.

Families who cant afford burial and funeral expenses – A small life insurance policy can provide funds to honor a loved one’s passing.

Businesses with critical employees – If the death of a key employee, such as a CEO, would create a severe financial hardship for a firm, that firm may have an insurable interest that will allow it to purchase a life insurance policy on that employee.

Married pensioners – Instead of choosing between a pension payout that offers a spousal benefit and one that doesn’t, pensioners can choose to accept their full pension and use some of the money to buy life insurance to benefit their spouse. This strategy is called pension maximization.

Advantages of Life Insurance: Most people use life insurance to provide money to beneficiaries who suffer financial hardship upon the insured’s death.

Creates employment opportunities: I n the modern-day business world, Insurance has become a sort of business hundreds of entrepreneurs and thousands of employees have been engaging in this line.

Hence by developing and establishing insurance companies, it has provided employment opportunities to many people, as per their qualification and caliber.

Funding Retirement – a source of retirement income is the policy with a cash value or investment component.

This opportunity can come with high fees and lower death benefits, so it may only be a good option for individuals who faced other tax-advantaged savings and investment accounts.

Avoiding TaxesThe death advantage of a life insurance policy is usually tax-free. Wealthy individuals sometimes buy permanent life insurance within a trust to help pay the estate taxes that will be due upon their death.

Comparing Types of Life Insurance

Term Life

Insurance Universal Life Insurance Whole Life

Insurance
Needs it helps meet Income replacement during working years Wealth transfer, income protection and some designs focus on tax-deferred wealth accumulation Wealth transfer, preservation and, tax-deferred wealth accumulation
Protection period Designed for a specific period (usually a number of years) Flexible; generally, for a lifetime For a lifetime
Cost differences Typically less expensive than permanent Generally more expensive than term Generally more expensive than term
Premiums Typically fixed Flexible Typically fixed
Proceeds paid to beneficiaries Yes, generally income tax-free Yes, generally income tax-free Yes, generally income tax-free
Investment options No No2 No
May help build equity No Yes Yes
Available through Fidelity Yes, Fidelity Term Life Insurance3 Yes, Universal Life Insurance, primarily focused on death benefit protection No, traditional Whole Life Insurance is not currently offered

The Islamic perspective: Term life insurance

This kind of Insurance is very much equivalent to all the other types of protective insurance discussed in the previous article. The same arguments apply, namely:

The kind of gharar that is being forbidden in the hadith is not the kind of gharar involved in modern Insurance;

The many positives of Insurance outweigh the negatives; and

if we accept takaful as Shariah-compliant, we must accept conventional Insurance as Shariah-compliant as there is little substantive difference between the two.

There may, however, be a few unique objections to life insurance in particular, which cannot be leveled against other kinds of Insurance, so let’s test if they’re compelling.

THE ISLAMIC PERSPECTIVE: WHOLE LIFE INSURANCE

Fundamentally, there is no problem with whole life insurance – but in reality, there will be for most people living in the West.

This is because this type of Insurance is best characterized as an investment and the permissibility of the investment depends on the underlying assets which are invested in.

This is not a problem in the Middle East if you opt to go with a takaful operator who will be restricted by their internal policies to invest only in halal assets.

Is Life insurance allowed in Islam?

Anas ibn Malik reported: A man from the Ansar came to the Prophet, peace, and blessings be upon him, and begged from him.

The Prophet said, “Have you nothing in your house?” The man said, “Yes, a piece of cloth, a part of which we wear and a part of which we spread on the ground, and a wooden bowl from which we drink water.”

The Prophet said, “Bring them to me.” The man brought these articles to him, and the Prophet took them in his hands, and he said, “Who will buy these?” Someone said, “I will buy them for one coin.”

The Prophet said twice or thrice, “Who will offer more than one coin?” Someone said, “I will buy them for two coins.”

He sold them for two coins, and the Prophet said, “Buy food with one of them and give it to your family. Buy an ax and bring it to me.”

The man brought it to him. The Prophet fixed a handle on it with his own hands, and he said, “Go gather firewood and sell it, and do not let me see you for a fortnight.”

The man went away and gathered firewood and sold it. When he had earned ten coins, he came and bought a garment and food.

The Prophet said, “This is better for you than for begging to come as a blemish on your face on the Day of Resurrection. Begging is appropriate only for three people: one in severe poverty, one in severe debt, and one who must pay difficult compensation.” [Abu Dawud]

The Prophet also said, “” It is the duty of a Muslim who has anything to bequest not to let two nights pass without writing a will about it” (Sahih al-Bukhari).” Again, Islam teaches us to take all necessary precautions for looking after our family even after we die. Islam forbids one from bequeathing more than 1/3 of the inheritance to other than the set people who are the deceased’s, immediate family.

Frequently Asked Question( FAQS ):

What is Gharar?

The argument against conventional Insurance is that it involves riba (interest), gharar (uncertainty), and may (gambling). This article will focus on the most vital and most central of these objections: gharar.

What is Takaful?

Branded Insurance is based on sharia or Islamic religious law, which explains how individuals are responsible for cooperating and protecting one another.

What is pension maximization?

It is a retirement strategy for couples to choose the highest possible annuity payout for one spouse’s lifetime while obtaining life insurance to provide income for the surviving spouse.

What are Premium payments?

An insurance premium is the amount of money an individual or business pays for an insurance policy.

Conclusion:

Finally, it is proved through the article that Life insurance is very Useful and had long-lasting effects for the beneficiaries.

Islam also allows the Person to take precautionary measures to look after their families.

I think the above arguments are relatively straightforward so that I won’t repeat myself here. In short, if you are considering life insurance, see if it is term insurance or whole life insurance.

If term insurance, my view is that it is okay. If whole life insurance, my opinion is that it is also acceptable to control the investments being sharia-compliant.

Life insurance and its working

It is a contract between insurance company and policy holding person. In which Life Insurance Company will pay an amount to your family in case you will be dead. But you have to pay premium payments.
After you death you family will utilize this money. It enables you family to stay at home and fulfill your dreams which you have planned, after your death. Moreover there are about two types of life insurance.

How Does Life Insurance Work?

People usually buy homeowners insurance because they want to protect their home and also buy car insurance to protect their car but they don’t think about their life insurance. You family is dependent upon you, at any stage if will be dead then your family may face difficulties. If you don’t want that you dependants will not face any financial crises then you should insurer you.
There are two main components of Life insurance policy.

1- Death benefit
2- Premium

Death Benefit

It is the lamb sum amount which the insurance company offers that they will give beneficiaries after you death. The person who purchase policy may be the husband and the beneficiary may be his wife or maybe he has a large family having daughter and sons then the beneficiaries might be they whole family. An insurance company policies varies from company to company. They will investigate that whether the policy holder qualifies all requirements.

Premium

It is the amount which a insurance holder pays to the company on monthly or yearly basis. It is mention in the agreement about the premium amount and how and when he has to pay the premium amount. If the premium amount is high then benefits at death are also more as compare to low premium.
Main Types of Life Insurance

1- Term Life Insurance

It is the most popular type of insurance, because it is affordable. In Term life insurance insure you life for a certain amount of time. In case you die in the time duration then beneficiaries can claim the amount. For example you insure you life you 10 years then if you die in next 10 year then they are bound to give death benefit.
Renewal of policy after expires also possible. In term life insurance you premium amount also stays same in this duration.

2- Permanent Life Insurance

It covers you whole life so it is call permanent life insurance. The main component of Permanent life insurance is cash value.

Cash Value:

We can withdraw cash money or borrow money against the insurance policy. It is also act like savings account because whenever you need money you can withdraw it according to your needs. Policies may change according to companies some company may have restrictions. You may take out a loan against it. You can also purchase more insurance with cash value. You can use cash value to pay premiums also.
There are different types of Permanent Life insurance.

1- Whole Life Insurance
It is a type of a Permanent life insurance policy in while holding whole life insurance policy’s beneficiaries will get a fix death benefit. Dividends may paid by the insurance policies. You can use it for reducing premium payments.

2- Universal Life insurance
In this type of Permanent life insurance policy you will get interest on cash value. you are able to adjust the premiums and death benefit before death. It is more flexible then whole life insurance.

1- Guaranteed Universal
In this type of Life insurance policy cash value is not build. Its premiums are lower as compare to whole life insurance.

2- Variable Universal
In this type of Life insurance policy you can invest policy’s cash.

1- Paid-up whole Life Insurance
Paid-up whole life insurance deals with the people who don’t want to pay premiums throughout life in this type of policy can pay premiums for years in lamb sum amount.

2- Indexed Universal
It is a type of universal life insurance that provides you the facility to earn fixed or equity indexed rate of return on your cash value.

3- Burial Insurance
It only covers your funeral cost. It is very small type of policy. Some People don’t have any relative who is able to pay funeral charges after death; this policy covers all such charges.

4- Survivorship Life Insurance
It is also a type of Permanent Life insurance which covers two people under one policy.
After the death of policy holders death benefit is paid to beneficiaries.

3- Guaranteed issue
In such type of permanent life insurance deals with the people who have medical problems.
It the patent dies in first two years then company will not pay death benefit and return all premiums including interest on it, to the beneficiaries in the policy holder dies before two years.

How much does life insurance cost?

Cost of life insurance may change from person to person. If you life is in risk due to heath issues, hobbies and age then it will cost more. There are more chances of your death instead of a health, young person. People who are suffering from diseases will pay higher premiums other then healthier.

What if I lie about my health to get better life insurance rates?
If you don’t disclose your correct health condition then it will be harmful for you in long run. Contestability period is of about two years. In case you die in you contestability period then you beneficiaries will not able to make claim.
People usually do it just to save money as less premiums rate for healthy people. If the insurance company fund after your death that you are doing fraud then they may refuse to pay. then your beneficiaries will get noting in such case.

How do I apply for life insurance?
You have to get quotes from broker. Five steps of getting life insurance policy is appended below.

1- Application and Interview
You have to provide you basic information like about health, hobbies etc in application form.
When you will submit your application then person from insurance company will contact you for interview. He will discuss about your health condition and then may schedule the medical exam.

2- Take the medical exam
Some insurance policy requires medical exam but some or not. Your medical examination can be done by checking your complete medical records. As I mention before that some polices requires medical examination in such case company will send a medical technician to your home or where you want for medical checkup. He will check up you same as a doctor.
He will make sure that the data given in application is correct or not.

3- Physician’s Statement

In case your are suffering from any serious disease. The insurance company will request your doctor to issue an attending physician’s statement.

4- Go Through Underwriting
After above three steps underwriter will calculate according to information provided in application and medical examination, your premiums cost. Underwriter will also contact medical information bureau for your medical history and compare it will your provided information in application.

5- Pay you First premium
After go through underwriting process, you will receive your policy. Policy will be activated when you will pay first premium.
How do I save money on life insurance?
You can save money on life insurance with some simple ways.

1- Buy it early
If you are interested in saving money on life insurance then you should buy it when you are young and fit. You are able to lock premiums rates for lifetime at that stage. you premiums amount will be same throughout life.

2- Coverage Amount
Selection of insurance policy according to coverage amount is very important. Select a insurance policy which you can easily continue in future. For example you select a policy which gives your children good death benefit but the premium is very high as you may not able to afford it at any stage then if you not pay the premium then the policy will be no use.

3- Get Healthy
If you want to get save money on life insurance then you have to make your health batter otherwise you will have to pay high premiums. Before medical examination by the insurance company stop smoking for about two years. You should reduce you weight if you are overweight. Stop drinking is also good for health.

How do my beneficiaries get paid when I die?
After your death it will take about two to three months that your beneficiaries will get death benefit. Your children will have to apply for claim. They will have to show them all documentary record regarding insurance policy. They will have to provide death proof like death certificate.
Beneficiaries have to options that time normally. They can receive the full amount which is tax free or they can receive it in installments. About 90% people chose to take it lamb sum.