Ethica Institute of Islamic Finance™

May I obtain any monetary benefits on compulsory insurance?

If one is legally obligated to purchase insurance, it is an obligatory condition that if the policyholder receives any monetary benefits from the insurer, the total payments that exceed the total premiums paid to the insurer (i.e. during the entire policy period, adding premiums paid for other insured items as well) must be distributed in charity; this excess amount constitutes riba because there is an unequal exchange of money (in the form of premiums) for money (in the form of monetary compensation); the principle being that the monetary relationship between the two parties (i.e. the insurer and the policyholder) must be equalized. In the event of a mishap, the aggrieved party is entitled to the current market value of the entire loss directly from the party at fault, with no intermediary (e.g. insurer) paying either party for insured losses; if the intermediation of an insurer is a legal requirement, it is permissible for the aggrieved party to take payment from the insurer.

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