Islamic Estate Planning is unfamiliar to most American Muslims. Understand that this FAQ on life insurance only answers general questions. This is not a replacement for a lawyer. If you want to schedule a 15-minute “mini-consultation” with Attorney Ahmed Shaikh, you can click here.
What is it?
Life insurance is a financial product that, in its purest form, will make a payment upon the death of the person who is insured. So, for example, an individual with a $1,000,000 policy will have this sum distributed to people he designates upon his death.
Is this acceptable in Islam?
Islamic Scholars tend to be divided on this question, however, most scholars take the position that insurance on life as understood in the United States is not permissible because it is gharar (unduly speculative). This view is particularly led by the scholars associated with the financial services industry, which has a sharia-compliant version not available in the United States. There are prominent Muslim scholars who take the position that life insurance as it is understood in the United States is permissible. Nearly everyone agrees any employer-provided policy that does not have any premiums is permissible.
Are there certain kinds of life insurance that unanimously regarded as prohibited in Islam?
Yes. Any life insurance with a savings component, such as whole life or universal life that is based on riba would be categorically prohibited in Islam.
Can I name my spouse as the sole beneficiary of my life insurance policy?
In general, the answer in Islam is no. Beneficiaries of policies must be consistent with the Islamic Rules of Inheritance, which typically includes many different beneficiaries.
I want to use life insurance to pay off debt for what is a community property asset. Is that possible?
Yes, it is possible to structure a plan that will accomplish this goal.
Can I use life insurance in my business succession planning, such as to fund a buy-sell agreement?
The answer to this question depends on the individual’s circumstances. Often partners have no choice in the matter. However, in other instances, there are choices as to how to do business succession planning.