Insurance And Takaful

Introduction

This is a guide to help you understand the
fundamentals of insurance and takaful. It tells you
about the types of insurance and takaful products
available and the basic principles of insurance and
takaful.
What is insurance?

You buy insurance to transfer the risk of loss to the
insurance company and thereby reduce your financial
hardship when you suffer the loss. For example, if your
insured motor vehicle is involved in an accident, your
insurance company will pay for the cost of repair. You
buy insurance by paying a premium to your insurance
company.

What is takaful?
Takaful is an insurance scheme based on Islamic
principles of joint guarantee, where a group of
participants agrees to mutually guarantee among
themselves against a defined loss. If you join a takaful
scheme, you agree to donate a certain portion of the
contribution into a takaful fund to assist any member
of the fund who has suffered any defined loss.
Depending on the terms of the takaful certificate, a
participant may also be able to share in the surplus of
a takaful fund if he has not made a claim during the
period of takaful. Anyone can join a takaful scheme
regardless of his religious beliefs.

Why buy insurance or join a takaful scheme?

The purpose of having insurance/ takaful is to reduce
your financial burden when you suffer from losses or
mishap so that there is minimal disruption to you and
your family’s daily activities. However, an insurance/
takaful plan only covers you for losses specified in
the plan. Therefore, if you are getting any insurance/
takaful, make sure it covers the losses you need to
protect.
What type of insurance/ takaful products do I need?

Your insurance/ takaful needs depend on your personal
situation, age and lifestyle. However, certain types of
insurance/ takaful are required by law, e.g. if you own
a motor vehicle, the law requires you to have a cover
to pay for liability caused by you to others.
What are the types of insurance/ takaful products available?

You can get different types of insurance/ takaful
to cover things you own, your life, your health and
for your retirement. You can find many types of
products that can meet your needs. The common
types of insurance/ takaful products are:

- Life Insurance And Family Takaful, which is usually
used as a means to provide financial aid for your
dependants if you die. You may also save or
invest through life insurance/ family takaful. Some
life insurance/ family takaful products also pay
out when you are unable to work due to illness
or disability. Examples of life insurance/ takaful
products are whole life/endowment, ordinary
family and investment-linked.

-Motor Insurance Takaful, which pays for
specific losses due to damage to your motor
vehicle involved in an accident. It also pays for
losses that your motor vehicle caused to others in
an accident.

Houseowner / householder insurance / takaful,
which pays for specific losses when your home or
your personal assets are damaged due to events
like fire, flood, burst pipes, etc. You may also get
protection against claims made by third parties
arising from these events.

Medical and health insurance / takaful,
which pays for various types of hospitalisation
and medical expenses that you may incur if you
become ill or injured. These include payments
for hospital room and board, professional fees,
medical supplies and medical services.

Personal accident insurance / takaful,
which pays a sum of money if you become disabled due
to an accident or if you die.

How do I know whether a takaful operator is Shariah compliant?

Shariah Committees have been set up by all takaful
operators to ensure that their takaful operations are
in line with the Shariah. Bank Negara Malaysia has
also set up a Shariah Advisory Council which acts as a
reference point for matters relating to Islamic banking
and takaful in Malaysia.

If you are getting any insurance/ takaful, make sure it covers the losses you need to protect
Insurance/ takaful principles

Your insurance and takaful products are subject to four
main principles which are observed universally, that is,
insurable interest/ permissible takaful interest, utmost
good faith, indemnity and contribution.

To get an insurance protection, you need to have an
insurable interest in the item or life to be insured.
Insurable interest is normally present by way of
relationship or ownership. For example, a person will
have insurable interest in his own or child’s life, house
or motor vehicle.

On the same basis, in takaful, you need to have
permissible takaful interest before you can join a
takaful scheme. An insurance/ takaful plan without
insurable interest/ permissible takaful interest is like
a gambling contract where the purpose of having
insurance/ takaful is to profit from it.

Utmost good faith means you need to state all the
material facts when you are buying a policy or joining a
takaful scheme. The purpose is to allow your insurance
company/ takaful operator to decide whether it should
provide the insurance or the takaful cover to you, and
the amount of premium or takaful contribution that it
should collect from you.

If you do not observe this requirement, your insurance
policy/ takaful certificate can become invalid and your
insurance company/ takaful operator can refuse to pay
a claim made by you.

Indemnity and contribution only apply to insurance/
takaful taken on your belongings. When you incur a
loss, the rule of indemnity will only allow you to get
an amount that will return you to the position you
were in before the loss. Under the contribution rule,
all insurance companies/ takaful operators providing
cover to a property will share in the damages of the
said property. In this way, a person cannot “profit” by
having more than one policy or takaful plan on the
same item.

Where can I get an insurance/ takaful plan?
You can get an insurance/ takaful plan:
- Directly from insurance companies or takaful operators respectively;
- Through registered agents, financial advisers or licensed brokers; and
- Through banking institutions having bancassurance arrangements with
insurance companies or bancatakaful arrangements with takaful operators,
respectively.

An insurance or takaful agent acts for an insurance
company or takaful operator and sells insurance
policies or takaful plans issued by the insurance
company or takaful operator only. An insurance or
takaful broker acts for the customer and advises
customer on the plan that he may need. A financial
adviser is an independent party that offers a variety of
financial planning services, including insurance/ takaful
to his customer.
Shop around

It pays to shop around for a plan that meets your
needs. You can compare premiums, terms and details
of exactly what is covered in the plan and what is
excluded. Different policies may have different terms
and conditions, rates and exclusion clauses. Get an
explanation if you do not understand any term so that
you are fully aware of what you are getting into.
Checklist: Getting an insurance/ takaful plan

Below is a checklist to guide you when getting an
insurance/ takaful plan:

- Deal with approved parties: registered agents /
licensed brokers or directly with an insurance
company or takaful operator.

- Compare premium / contribution rates. Get
quotations from several insurance companies/
takaful operators and/ or agents.

- Compare benefits, term, product features
limitations and exclusions.

- Make sure you can afford the premium or
contribution of the cover.

- Have enough cover. Avoid getting too much or too
little cover.

- Make sure your application form is fully completed,
information given is accurate and all material facts
are fully disclosed.

- Go for thr necessary medical check-up requested as
soon as possible.

What is a material fact?

A material fact is any fact relating to you or the object to
be covered that the insurance company/ takaful operator
should know so that it can make a decision on whether it
should grant you the cover, the amount of premiums you
need to pay and the terms to be applied. The insurance
company/ takaful operator will normally get these facts
from the application form. As such, if you are not sure
of any questions in the application form, you should get
an explanation and not guess or leave the item blank. In
life insurance/ family takaful, facts commonly deemed
as material include occupation, financial status, family
medical history, state of health and lifestyle.

Paying premium/ contribution

When you pay your premium/ contribution, make sure
that your cheque is issued to your insurance company/
takaful operator if you pay through an agent. Otherwise,
try to pay your premium directly to the insurance
company/ takaful operator. There are many ways you can
pay your premium/ contributions such as autodebit from
your bank account, via Internet banking, credit card and
using telephone banking.
You should ask for a receipt for the premiums/
contributions paid and contact your insurance company/
takaful operator if you have not received the policy within
one month after the purchase.
What must I do if I have an insurance/ takaful plan?

An insurance policy/ takaful certificate is a legal
document. As such, you need to observe the terms
of the policy/ certificate so that your plan can remain
effective. You should:

- Read the insurance policy . takaful certificate
when you receive it. Sort out with your insurance
company/ takaful operator if things are not as
agreed earlier.

- Understand your right and responsibilities as a
policyowner/ participant of a takaful plan.

- Monitor the period of your insurance / takaful plan
and time for payment of premium/ contribution so
that there is no gap in your cover.

- Notify your insurance company / takaful operator of
any changes to any material fact.

- Update your insurance company / takaful operator
on your mailing address to recieve all notice on time.

- Keep your policy / certificate in a secure place.

- Notify your insurance company / takaful operator as
soon as possible when there is a claim.

- Take action to protect your assets from further
losses after your assets have been damaged, e.g. in
an accident, as such losses will not be covered by
your insurance/ takaful plan.
Frequently asked questions

Q: What is the difference between insurance and takaful?

A: Both insurance and takaful provide protection
against risks. However, takaful is an insurance
scheme based on Shariah where a person who joins
a scheme will undertake a contract (aqad) to agree
to help other members in the scheme when they
suffer a defined loss or mishap.
Q: How do I ensure that the person I deal with is an authorised person to sell insurance or takaful products?

A: Ask for the person’s authorisation to prove that if he
is properly registered or licensed to sell insurance/
takaful products. Note that:

- All insurance agents selling life insurance policies
are registered with the Life Insurance Association
of Malaysia.

- All insurance agents selling general insurance
policies are registered with Persatuan Insurans Am
Malaysia.

- All takaful agents selling takaful product
are registered with the Registrar of Takaful Intermediaries.

- All financial advisers and insurance brokers are
licensed by Bank Negara Malaysia under the
Insurance Act 1996.

- All takaful brokers are licenced by Bank Negara
Malaysia under the Takaful Act 1984.

Q: How do I know what a material fact is?

A: A material fact is any matter that is needed by
the insurance company/ takaful operator to make
a decision whether to accept your proposal for
insurance or takaful. Generally, the proposal form
used by the insurance company or takaful operator
would have been designed to gather the required
facts. You should correctly and accurately answer all
the questions in the proposal form. If you are not
certain, you should check with your insurance/ takaful
agent or insurance company/ takaful operator.
Q: I have been paying my life insurance premiums/ family takaful contributions regularly through my insurance / takaful agents. However, when I made a claim recently, my insurance company / takaful operator informed me that my policy has lapsed as I did not pay the premiums/ contributions required. What should I do?

A: You should lodge an official complaint to your
insurance company/ takaful operator for its
investigation. Provide your insurance company/
takaful operator with all the documents on your case
including copies of receipts and name of the agent
involved. If you have the relevant documents, your
insurance company/ takaful operator will be liable for
the claim. However, if you do not have any document
or other proof, your insurance company/ takaful
operator may reject your claim.

To protect yourself, if you have an insurance/ takaful
plan, always ensure that your premiums/ contributions
are made payable to your insurance company/ takaful
operator. Follow up with your insurance company/
takaful operator for an official receipt upon payment
and file all letters including policy contract/ takaful
certificate and receipts properly.
Glossary

Indemnity

Putting the policy holder to the same financial
position immediately before a loss by payment, repair or
replacement.

Insurable interest

A basic rule of insurance requiring the person buying
insurance to have an insurable interest in the subject
matter to be insured or life of the insured in that the
loss or damage to the subject matter or any misfortune
which occurs to the insured would result in a financial
loss to the policy holder. In takaful, this requirement is
called permissible takaful interest.
Material fact
Any matter that is relevant to the decision of the
insurance company/ takaful operator on whether to
accept the risk concerned and the rates and terms to
be applied.
Utmost good faith
A requirement on the person buying an insurance
or takaful product to state all relevant details in the
application form to the insurance company/ takaful
operator to allow the insurance company/ takaful
operator to consider his application fairly.