# Takaful Insurance: What It Is and How It Works

![Takaful Insurance](https://www.investopedia.com/thmb/-cNCJvEvnNdv08-2quY1fcZXaDU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Takaful_final-b92564eedb654588b36c9c7c2b3e5031.png)

*Takaful is prevalent in Malaysia, Indonesia, Saudi Arabia, the UAE, and other Gulf Cooperation Council countries. — Michela Buttignol / Investopedia*

> **Definition**
>
> Takaful insurance is a type of Islamic insurance in which members contribute money into a pool system to guarantee each other against loss or damage.

## What Is Takaful?

Takaful is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against damage or loss. Takaful-branded insurance is based on [sharia](https://www.investopedia.com/terms/s/shariah.asp) or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another. Takaful policies cover health, life, and general insurance needs.

Takaful insurance companies were introduced as an alternative to those in the commercial insurance industry, which are believed to go against Islamic restrictions on [riba](https://www.investopedia.com/terms/r/riba.asp) (interest), _al-maisir_ (gambling), and _al-gharar_ (uncertainty) principles—all of which are outlawed in sharia.

### Key Takeaways

*   Takaful is a type of Islamic insurance in which members contribute money into a pool system to guarantee each other.
*   Takaful-branded insurance is based on sharia or Islamic religious law and covers health, life, and general insurance needs.
*   Any claims made by participants are paid out of the takaful fund.

## Understanding Takaful

All parties or policyholders in a takaful arrangement agree to guarantee each other and make contributions to a pool or mutual fund instead of paying premiums. The pool of collected contributions creates the takaful [fund](https://www.investopedia.com/terms/f/fund.asp). Each participant’s contribution is based on the type of coverage they require and their personal circumstances. A takaful contract specifies the nature of the risk and the length of the coverage, similar to that of a conventional [insurance](https://www.investopedia.com/terms/i/insurance.asp) policy.

The takaful fund is managed and administered on behalf of the participants by a takaful operator, who charges an agreed-upon [fee](https://www.investopedia.com/terms/f/fee.asp) to cover costs. Much like a conventional insurance company, costs include sales and [marketing](https://www.investopedia.com/terms/m/marketing.asp), [underwriting](https://www.investopedia.com/terms/u/underwriting.asp), and claims management.

Any [claims](https://www.investopedia.com/terms/i/insurance_claim.asp) made by participants are paid out of the takaful fund, and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the takaful operator. Those funds may be distributed to the participants as cash dividends or distributions, or via a reduction in future contributions.

An Islamic insurance company operating a takaful fund must operate under the following principles:

*   It must operate according to Islamic cooperative principles.
*   A [reinsurance](https://www.investopedia.com/terms/r/reinsurance.asp) commission may only be received from or paid out to Islamic insurance and reinsurance companies.
*   The insurance company must maintain two separate funds: a participant and policyholder fund, and a shareholder fund.

## Special Considerations

According to Allied Market Research, the global takaful insurance market was valued at $31.7 billion in 2022 and is projected to reach $126.8 billion by 2032, growing at a [compound annual growth rate (CAGR)](https://www.investopedia.com/terms/c/cagr.asp) of 15.2% from 2023 to 2032. 

> **Important**
>
> Since 60% of the global Muslim population is composed of young Muslims—less than 25 years old—this demographic can represent a sizable customer base as their wealth grows over time.

Some of the largest names in the takaful market, according to a Research and Markets report, were believed to be the following:

*   Islamic Insurance Company
*   JamaPunji
*   AMAN
*   Salama
*   Standard Chartered
*   Takaful Brunei Darussalam Sdn Bhd
*   Allianz
*   Prudential BSN Takaful Berhad
*   Zurich Malaysia
*   Takaful Malaysia
*   Qatar Islamic Insurance Company

## Takaful vs. Conventional Insurance 

Most Islamic jurists conclude that conventional insurance is unacceptable in Islam because it does not conform with sharia for the following reasons:

*   Conventional insurance includes an element of _al-gharar_ or uncertainty.
*   Conventional insurance is based on the concept and practice of charging [interest](https://www.investopedia.com/terms/i/interest.asp). Islamic insurance, on the other hand, is based on _tabarru,_ where a portion of the contributions made by participants is treated as a donation. This is why policyholders in takaful are usually referred to as participants.
*   Conventional insurance is considered a form of gambling.

> **Article Sources**
>
> 1.  Institute of Islamic Banking and Insurance. “[Islamic Insurance (Takaful)](https://www.islamic-banking.com/explore/islamic-finance/islamic-insurance-takaful).”
>     
> 2.  Allied Market Research. “[Takaful Insurance Market Research, 2032](https://www.alliedmarketresearch.com/takaful-insurance-market-A11835).”
>     
> 3.  Research and Markets, via Internet Archive Wayback Machine. “[Takaful Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2023–2028](https://web.archive.org/web/20240329010300/https://www.researchandmarkets.com/reports/5732368/takaful-market-global-industry-trends-share).”
>     
> 4.  Research and Markets. “[Takaful Market Report 2025–2033](https://www.researchandmarkets.com/report/takaful).”