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June 5, 2024

Deciding Between Insurance and Takaful? Here’s Some Things to Know So You Can Select the Best Option

Learn the similarities and differences between insurance and takaful in Malaysia and how to choose the right protection plan.

There are many reasons why insurance and takaful is so important to have, but perhaps the most important one is that it helps you pay for sudden and usually very expensive expenses, especially if something unfortunate were to happen.

Imagine you’re traveling abroad when you trip and sprain your ankle. Depending on where you are in the world, the treatment costs can vary, but let’s say you’re in New York and the bill comes up to RM4,000. Will you be able to pay your bill without hurting your travel budget and your bank balance?

Now, imagine if you had travel protection – you would have been able to get your treatment with very little damage to your wallet!

This is only one example of how insurance and takaful can protect you, and there are so many types of insurance and takaful plans available for all sorts of needs, including protection plans for health, house, vehicle, family, life, education and more. We understand, it can get confusing, even more so when you need to consider these three things.

Three Things to Ask Yourself When Choosing Protection:

What to Protect

How Much Can
I Afford

Insurance or Takaful

We’ll help you tackle that last question below.

But First, a Little History

The insurance industry in Malaysia was established in the 18th and 19th centuries focusing mainly on property and commodities. Despite this long history, it was only in the 1970s that insurance companies began to offer private health insurance to individuals.

In the 1980s, insurance companies in Malaysia began introducing takaful products to those who wanted protection that was also shariah-compliant. Still, it took until the mid 1990s before the personal insurance and takaful industry really grew, largely because the purchase of insurance and participation in takaful products were made tax deductible.

18 & 19th centuries
Insurance industry established focusing on property and commodities.


1970s
Insurance companies begin offering private health insurance to individuals.


1980s
Insurance companies begin introducing takaful products.


1990s
Rapid growth of the personal insurance and takaful industry due to the introduction of tax deductions.

The insurance and takaful industry has grown significantly since then, offering all sorts of products to meet various needs and requirements. Now let’s take a look at how insurance and takaful are similar, yet different from one another.

Insurance and Takaful: The Similarities and Differences

Insurance and Takaful Share a Few Key Similarities

Provides protection in exchange for a yearly or monthly fee.

Types of protection includes healthcare, life, property, travel, motor and more.

Anyone can apply

*Depending on the policy/certificate, medical check-ups and age limits may apply.

Get customised protection according to your budget and needs.

Managed by an operator licensed by Bank Negara Malaysia.

When it comes to protecting yourself and your finances, both insurance and takaful will get the job done. The factors that can help you decide which one to go for will probably boil down to its differences:

Takaful
Insurance
Customer
Takaful customers are known as participants.
Insurance customers are known as policy holders.
Protection Agreement
The protection agreement between the takaful company and a participant is known as a certificate.
The protection agreement between an insurance company and a policy holder is known as a policy.
Fees
Takaful fees are called contributions.
Insurance fees are called premiums.
Operating Principle
Takaful operators charge a fee for managing the contributions made by participants. The rest of the contribution goes towards a fund shared by all participants. Any claims made by participants will be paid from this fund. This is known as ta’awun. Any excess funds after the claims are paid and reserves provided for will be equally shared by the participants.
Insurance companies derive their income from premiums collected. The policy holders and the insurer have entered a contract whereby the insurer will pay out claims based on the contract (policy) specifications. Any claims made by policy holders will be paid from this income.
Compliance
Takaful is bound by shariah and local government laws.
Insurance is bound by local government laws.
Investments
All takaful investment portfolios are strictly bound by shariah rules (no gambling, usury, uncertainty, etc.).
Insurance investment portfolios can include a variety of businesses and industries.
Risk
Risk is shared across all participants.
Insurance providers take on all risk.
Death Benefits
For Muslims, takaful death benefits can be gifted to anyone as hibah. Non-Muslims can will their death benefits to anyone.
For non-Muslims, insurance death benefits can be willed to anyone. For Muslims, the distribution of death benefits will be bound by faraid rules.

The Most Important Thing is to Get Yourself Protected

When it comes to getting protection, you can’t go wrong with insurance or takaful, but you must get protected first to be covered by their benefits. Do not put off making your decision because anything can happen in the meantime, and you will be left needing to use your hard-earned savings, or having to borrow money from others to get the help you need. Don’t wait. Get yourself protected !

Etiqa has a variety of takaful and insurance products to support your needs. Check out our life stages quick guide to help you understand your protection needs better.