Takaful vs conventional life insurance: the real differences
Takaful and conventional life insurance do the same job for a family: money if someone dies, and savings for the future. The difference is in the contract underneath: who owns the fund, how the company is paid, and where the money is invested. This article walks through it using State Life's own Takaful rules.
In short
- In conventional insurance you buy cover from the company. In Takaful, members donate to a shared fund that pays claims, and the company manages it for a fee.
- Takaful money is invested only in Shariah-compliant assets, with no interest.
- Any surplus in the members' fund belongs to the members. At State Life, 97.5% of it is shared back as bonuses.
- State Life offers both, under one roof but in separate funds.
How conventional life insurance works
You pay premiums to the insurer, and in return it promises to pay the sum assured when the plan ends or if you die first. Your premiums go into the insurer's life fund, which State Life invests in government securities, rental property, shares and bank deposits.
State Life's conventional plans are "with-profits": every year 97.5% of the surplus goes to policyholders as a bonus, added to the policy for every Rs. 1,000 of sum assured. See this year's bonus rates.
How Takaful works
This is how State Life's Window Takaful Operations describe their own plans:
- Members pay a contribution on a donation (tabarru') basis into a Waqf fund, the Participants' Takaful Fund.
- State Life manages the fund as an agent (wakeel) and charges disclosed fees, such as a yearly administration (wakala) fee and a fund-management fee.
- Claims are paid from the members' fund.
- If the fund makes a surplus, 97.5% is shared with members as bonuses, after approval by the Shariah Advisor and the appointed actuary. The other 2.5% goes to State Life as its fee.
- If the fund runs short, State Life lends to it interest-free (qard-e-hasna), to be repaid from future surpluses.
- In savings plans, part of each contribution buys units in a Shariah-compliant investment fund, held in your own account.
Side by side
What stays the same
- Your family is paid if you die during the term, and a savings plan pays you a lump sum at the end.
- Both have a 14-day free-look period to cancel a new plan, and a cash (surrender) value after two years' payments.
- Both offer extra cover, such as an accidental death benefit.
- On State Life's Takaful savings plans, the sum covered and declared bonuses carry the same Government of Pakistan guarantee as its conventional plans.
- One difference to note: in a unit-linked Takaful plan, the investment account is not guaranteed. Its value follows the fund it is invested in.
Which should you choose?
- Choose Takaful if you want your savings and cover to be Shariah-compliant. Most scholars require it; see what scholars say about life insurance.
- Choose a conventional plan if your scholar permits it and a particular plan suits you better, for example Jeevan Saathi for a couple or Family Pension Plan for a monthly family income.
- Compare like with like: Takaful Golden Endowment with Golden Endowment, and Takaful Platinum Plus with Platinum Plus.
Talk it through with an advisor
Free, no-obligation advice from an authorized State Life advisor, and a year-by-year illustration for your own age and budget. You can also ask us anything on WhatsApp.
Questions people ask
- Is Takaful more expensive than conventional insurance?
- Not necessarily. The charges are set out differently (a wakala fee, allocation charges and a fund-management fee), so compare the illustrated benefits of both plans for your age and budget. We prepare both for free.
- Is my Takaful money mixed with State Life's conventional business?
- No. The SECP's Takaful Rules 2012 require a window operator to keep Takaful funds separate from its conventional business.
- Who checks that it is Shariah-compliant?
- State Life's Window Takaful Operations have a Shariah Advisor, Mufti Muhammad Hassaan Kaleem. The SECP also requires window operators to appoint a Shariah compliance officer and a Shariah compliance auditor.
- What happens to the surplus?
- At State Life, 97.5% of the distributable surplus in the members' fund is shared with members as bonuses, and 2.5% goes to State Life as its fee.
- Can a non-Muslim join a Takaful plan?
- Yes. Takaful is open to everyone.
Plans mentioned here
Keep reading
Sources
StateLife Advisors is an independent agency authorized to sell State Life products; this is not the official State Life website. Product facts and bonus rates are as published by State Life Insurance Corporation of Pakistan. Sum assured and declared bonuses are guaranteed by the Government of Pakistan; future bonus rates are not. This is general information, not religious, legal or tax advice.