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A complete guide: Takaful vs conventional insurance in Malaysia


As a pioneer in Islamic financing, we can expect Malaysia to have an advanced Takaful system. Here, we compare Takaful vs conventional insurance, and how you can benefit from them.

difference between takaful and conventional insurance
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One of the elements of a responsible financial plan is covering yourself with insurance. Therefore, one dilemma many Malaysians might face is Takaful vs conventional insurance. At first glance, they may look similar, as they both share the objective of protection against financial loss. However, some closer inspection will reveal some clear differences.

What is Takaful?

A basic definition of Takaful is a joint guarantee. It is a system of insurance based on Islamic principles. The concept of Takaful revolves around a group of participants mutually guaranteeing each other against loss or damage. Each participant fulfils their obligation by contributing a certain amount of donation (tabarru) into a fund. A third party – the Takaful operator, manages this fund.

In the event of loss or damage suffered, the Takaful operator will disburse the funds according to its participants.  Any surplus is paid out only after the obligation of assisting the participants has been fulfilled. Takaful operates as protection and profit-sharing venture between the Takaful operator and the participants through this principle.

History of Takaful insurance in Malaysia

As Malaysians, we can be proud that our country happens to be a pioneer and global leader in Islamic finance. Takaful Act was enacted in 1984 whereas Syarikat Takaful Malaysia Bhd was established in November 1984. It is the first-ever Islamic insurance company.

Can non-Muslims sign up for Takaful

Despite being based on Islamic principles, Takaful isn’t a religious product and it is available to everyone, including non-Muslims. In fact, Takaful and Islamic finance products are increasing in terms of popularity amongst non-Muslims.

READ: Basic term VS semi flexi VS full flexi loan: Know the difference

Why is conventional insurance not allowed in Islam

Conventional insurance does not comply with Sharia (Islamic law) because it contains these three elements:

  • Gharar

This is unqualified uncertainty, chance, or risk. Gharar exists since there is an uncertainty of what the insurance policyholder is “buying” or paying for if no loss occurs and the policyholder receives nothing.

  • Maisir

This is gambling or games of chance. Maisir is present because the payment of the sum insured depends on pure chance.

  • Riba

This is what is known as interest in conventional finance. It comes into play when funds are invested in interest-bearing securities.

What are the similarities between Takaful and conventional insurance

How does Takaful different from conventional insurance
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Both Takaful and conventional insurance protect in the event of unforeseen events. Participants make contributions to start the coverage. For both policies, the insured must have a legitimate financial interest in the risk. This means that the participant must suffer a financial loss when the insured event occurs.

  • What is the most important feature that distinguishes Takaful from conventional insurance

The most glaring difference between Takaful and conventional insurance is Takaful complies with Sharia law. Takaful is void of any elements of gharar, maisir, or riba. Takaful was created as an alternative to conventional insurance mainly to avoid these prohibited elements.

What is the difference between Takaful and conventional insurance

Other than the main feature mentioned above, there are a few other differences between the two policies. In conventional insurance, the risk is transferred from the insured to the insurer. Takaful, on the other hand, is based on shared risk. Each participant donates to a Takaful fund and in the event of loss, the participant will receive the amount of its claim.

Furthermore, unlike conventional insurance, the participants in Takaful retain an ownership interest in the fund. Contributions from the participants are later invested into ‘halal’ or Sharia-compliant funds to derive investment income. In the event when the fund generates a surplus, it is then shared among the participants and, in some cases, with the Takaful operator. This creates a ‘win-win’ situation for all participants.

A summary of Takaful vs conventional insurance can be seen in the table below:

TakafulConventional insurance
Mutual cooperation. Funds are contributed by donations from participants. The pooled funds can be used to protect other participants from risk.A policy that shifts the risk to the insurance company. You pay a premium to receive coverage.
Subject to both Sharia and government laws.Subject to government laws only.
The Takaful operator will only invest in Sharia-compliant instruments that are free from gharar (uncertainty), maisir (gambling and chance), and riba (interest).Insurance companies are free to invest in legal instruments like stock, bonds, etc.
Profits or surplus are shared among the participants and operators of a Takaful fund.Dividends are returned to shareholders.

What are the benefits of Takaful in an economy

According to a report by the International Journal of Advanced Research in Economics and Finance, the Takaful industry has a positive effect on the economic growth and development in Malaysia.

The three leading indicators of economic growth are savings, investment, and income. Here’s how Takaful has left a mark on all three elements:

  1. The inclusion of savings and investment elements on Takaful products has made it more complex and positive in providing early preparation (in case of emergency) to policyholders.
  2. As compared to conventional insurance, Takaful is a popular instrument for saving among Malaysians, due to its Sharia-compliant characteristics. This is further boosted by the fact that it is available to everyone, including non-Muslims.
  3. Takaful has a strong fund pooling capacity. This helps to induce investment contributing to the country’s Gross Domestic Product (GDP) in boosting the nation’s income.
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Why is Takaful better than conventional insurance

advantages of takaful over the conventional insurance
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Here are four reasons why Takaful is better than conventional insurance:

i. You get profit, instead of a bonus

All participants and shareholders share profits from investments. This differs from conventional insurance. Any extra money or profit under this coverage belongs to the shareholders of the insurance companies.

ii. Free from riba (interest) 

Conventional insurance companies aim to collect premiums and interests under-owned accounts to achieve profits. The goal of Takaful, by comparison, is to achieve cooperation among its participants.

iii. Cashbacks

For certain Takaful products, there is a certain amount of cashback if you do not have any claims to make during the coverage period.

iv. Good deeds 

Mutual cooperation is the underlying concept of Takaful. A pooled fund provides mutual financial aid. This is collectively contributed by a group of people under Takaful.

READ: Housing loan: How to apply as a first-time homebuyer in Malaysia

What are the types of insurance in Malaysia

There are a number of insurance providers that provide Takaful plans for consumers. To name a few; BSN Prudential, ETiQa Takaful, and Zurich Takaful. Insurance in Malaysia can generally be categorized as the following:

  • Health insurance

This is emergency cover for hospitalisation, treatment, and your recovery. Among the types included in this category are medical cards, critical illness plans, and hospital income insurance.

  • Life insurance

This provides cash benefits for your family in case of death. The types of insurance in this category include whole life insurance and term insurance.

  • Protection Insurance

Coverage plans for travel, commuting, and everyday life. The types of insurance in this category include travel insurance and personal accident insurance.

  • Property insurance

This is a plan to protect your assets and things that are valuable to you. The types of insurance in this category include motor insurance, home insurance, and pet insurance.

Takaful for homeowners in Malaysia

house insurance in malaysia
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As you would expect, there is a Takaful option for home insurance in Malaysia too; Mortgage Reducing Term Takaful (MRTT) and Mortgage Level Term Takaful (MLTT). The policies are usually a comprehensive scheme to protect your home, belongings, and assets. It provides coverage in the event of loss or damage caused by any of the following:

  • Fire, lightning, thunderbolt, or subterranean fire
  • Damages caused by aircraft and impact by vehicles or animals
  • Bursting or overflowing of water tanks or pipes
  • Theft and burglary
  • Flood, hurricane, typhoon, windstorm
  • Loss of rent
  • Public liability

READ: (Part 1) Housing loan checklist: 4 documents you need to prepare if you’re an employed person

Edited by Rebecca Hani Romeli

Disclaimer: The information is provided for general information only. Malaysia Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.

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