Takaful is a Shariah compliant insurance option grounded in Islamic Muamalat (Islamic transactions) products. ... The term Takaful also refers to the concept of Islamic insurance based on mutual cooperation, where both risks and funds are sharedbetween the insured and insurer.

The Difference Between Takaful and Conventional Life Insurance

Although essentially both Takaful and conventional life insurance serves the same purpose of providing coverage, there are major differences between the two as can be seen below:

Intent

Individual enters the agreement to contribute to a fund that can potentially help those experiencing the unfortunate situation. On the other hand, a conventional insurance policy is purchased as a personal financial security for an individual, and the insurance company is the risk bearer.

Investment

The conventional investment units of insurance will invest based on their assessment of what fits their profiles. However, Takaful investments will follow strict principles. Takaful cannot invest in anything that has elements of gambling, uncertainty or the practice of lending money at unreasonably high-interest rates.

Returns

If there is extra money because of low claim rates by insurers under Takaful, it will be distributed to participants. While the profits from investments will be distributed to both participants and shareholders. Takaful operators make money through performance fee or by sharing the surplus. But the total amount of payment from the surplus that Takaful operators get cannot exceed the amount that is paid to Takaful participants.

However, under conventional insurance, extra money and profits belong to the shareholders of the insurance companies.