Is private placement life insurance Shariah compliant?

Private Placement Life Insurance (PPLI) is a type of life insurance that is available exclusively for high-net-worth individuals. A trust is set up for the PPLI holder who will then purchase an insurance policy higher than the actual value with the additional amount going into the trust set up earlier. The insurance company manages the holder’s assets who get pay-outs in accordance with the profits his assets reap. As insurance policies are not taxed, this is a method that enables high net-worth individuals to legally evade taxes. Is PPLI Shariah compliant? If not, can they be modified to be Shariah compliant?

A life insurance policy pays out an agreed amount known as “the assured sum” under certain circumstances. Such circumstances include permanent disability, or critical illness. The assured sum is intended to ease the financial load of the life insurance policy holder and his or her dependents should these unfortunate events take place. In exchange for such financial protection or coverage against these risks, the life insurance policy holders pay a regular premium for a certain period of time.

Given the uncertainty of the occurrence of any of the above-mentioned unfortunate events, life insurance policy holders pay regular premiums without knowing if they will ever cash it in. This uncertainty creates a concern that such life insurance policies may not be Shariah-compliant. In this regard, there are elements of Maysir, which directly translates to “gambling”, as well as Gharar, which means “speculation” or “uncertainty”. Such elements exist because of two main reasons. Firstly, there is potential to acquire wealth simply my chance. Secondly, more often than not, life insurance policy holders do not know where or how their funds are invested. Thus, in conventional life insurance, the insurer only pays out when something happens to the policy holder. The insurer stands to gain if no claims are made by the policy holder.

PPLIs thus, at first glance, seem to similarly not be Shariah-compliant, as it would be presumed to share the same if not similar features and characteristics as conventional life insurance policies. However, with the existence of Takaful, or the Shariah-compliant alternative to insurance, PPLIs can be possibly tweaked to become Shariah-compliant.

Takaful is a type of Sharia-compliant insurance whereby participants in the Takaful make regular contributions towards a pool of funds and undertake to guarantee each other against any losses or damage. This pool of funds creates the Takaful fund. These regular contributions are characterised differently from the regular premiums paid under a conventional life insurance policy. Takaful is centred around the concept of shared responsibility within a community of individuals to cooperate with and protect one another.

It is mandatory for the Takaful operator to maintain two separate funds – the participants’ fund and the shared pool of funds. In Takaful, the participant pays regular contributions, with the certainty and knowledge that a portion of his or her contributions will go towards a form of charity that will go into a fund to pay out other participants in case tragedy strikes them. The contributions that do not go towards this fund will go into a savings fund for the participant and this money will be invested, with the profits being shared between the participant and the Takaful operator in a pre-arranged ratio. Any claims made by any of the participants of the Takaful fund would be paid out of the said Takaful fund, and any surpluses belong to the participants of the fund, not the Takaful operator. Such surpluses can be enjoyed by the participants either by redistributing the same to these participants in the form of cash dividends / distributions or a reduction in future contributions.

Thus, the elements of Maysir and Gharar are somewhat removed, and both the participant as well as the Takaful operator stand to gain from these regular contributions. The underlying principles of fairness between parties are, therefore, still upheld. Furthermore, as there is a date of maturity for family Takaful contracts, there is certainty as to how long contributions would have to be made, thus eliminating the Gharar element.

Similarly, PPLIs can thus be Shariah compliant if a Takaful operator structures a private fund in which to invest the assets of the PPLI holder in a way whereby the asset owner can still enjoy coverage through group participation, with the additional contributions going into a collective fund as charity for all participants. These contributions could in fact be funded from the returns on the PPLI owners own assets that are managed by the operator. The PPLI holder’s assets, if liquid, would be invested into a Shariah compliant or Halal business such that the profits gained are Halal. Thus, with the right contractual terms, PPLIs can be Shariah compliant.

This would be a new area of high-end client management that many Takaful operators in the region can explore.

Abdul Rahman is the managing director of Abdul Rahman Law Corporation. He can be contacted at rahman@arlc.com.sg .

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