The Conventional insurance is well established and caters individuals and businesses choosing to insure against risk. Based on Islamic law the conventional insurance system is strictly forbidden from as it involves uncertainty. Takaful is an old concept which is now gaining popular ground as a legitimate option which is based on risk sharing rather than risk transfer. TAKAFUL insurance is in fact an option for anyone and is not limited to those who abide by Islamic law.
Islamic Insurance TAKAFUL is a cooperative insurance, Cooperative Insurance is generally based on the concept that the negative impact of an incident is distributed among subscribers.
In this Insurance Model, the Insurance company act as cooperative society where the profit and losses shared by holders of Insurance Policies, simply because TAKAFUL model treat policyholders as shareholders in the cooperative society not as customers.
Most practiced model of TAKAFUL that Insurance provider invest money collected form policyholders (premiums) in different investments fields, regularly (normally each quarter) the insurance provider release the financial statement regarding the firm profit and loss status.
When policyholder (shareholder) terminate the policy, policyholder receive the initial paid premium with added profit or deducted loss based on financial results of the insurance provider.
However below conditions are the essential stipulations for company to comply with TAKAFUL:
1) Insurance Provider treat policyholder as shareholder in cooperative society.
2) Premium paid by policyholder represent shares.
3) Specification of period for the agreed policies which is to be contained in the agreement.
4) Insurance provider investments must comply interest free project (Usury free)
5) Misleading: misleading is totally prohibited in Islam, contract terms and conditions must be very clear and understandable by policyholders and implicate no misleading clauses.