Are ULIPs Permissible Under Shari’a?

Answered by Shaykh Muhammad Carr

Question

The ULIP Structure

A Unit-Linked Insurance Plan (ULIP) consists of two components:

• Insurance: A fixed, non-refundable mortality charge is deducted from the investment to provide life insurance coverage.
• Investment: Funds are invested in a portfolio composed exclusively of Shari‘a-compliant stocks and companies.

Are such ULIPs permissible (Halal) under Shari‘a?

The primary concern lies in the inherent structure of the insurance component, which is based on conventional commercial insurance, and its compulsory linkage to the investment element. This may involve elements of contractual uncertainty (gharar) and interest, even if the underlying investments themselves are Shari‘a-compliant.

Answer

In the Name of Allah, the Most Merciful and Compassionate.

Thank you for reaching out and seeking clarification on this important matter. I understand your concerns, and it’s commendable that you seek to ensure that your financial arrangements align with Islamic principles.

A ULIP contract is Shari‘a non-compliant. A ULIP contract entails two contracts integrated into a single transaction, with a single price listed in the contract. Since the primary cojoined to contract is impermissible, the entire arrangement is considered invalid. [See Jamal, Hashiyat al-Jamal]

Division of Transaction

Integrating two contracts into a single transaction is a complex case that has perplexed jurists. [Ibid]. On the one hand, scholars are committed to separating the impermissible part of the contract from the permissible part and affording each its consequent ruling. An example would be selling vinegar and wine in a homogeneous contract. Such a contract is considered valid based on the principle of division of transactions (tafriq al-safaqa).

The present case involves a hybrid contract that combines elements of insurance and investment within a single agreement. When the rulings governing distinct contracts differ in their binding and non-binding nature, and each has its own set of mutually exclusive regulations, it is not permissible to combine them into a single transaction. [Ibid]

The Case At Hand

On the face of it, the investment contract may be cojoined to the insurance contract. Conventional insurance policies are binding commutative transactions. The premium is in personam, meaning it must be paid up front.

Investment arrangements are typically based on an investment agency contract (wakala bi al-Istithmar). This is a non-binding contract. An agency contract for a fee is treated as a service-level agreement (ijara). For purposes of this discussion, the service level agreement is in personam. As such, the remuneration has to be paid upfront.

Therefore, even though they are at variance with each other as regards their binding and non-binding nature, they can be joined as the rulings relating to enactment are the same.

The Problem 

The issue is that the insurance contract is impermissible. In the present case, it is also the primary contract. If the contract being cojoined to is invalid, then the cojoined contract is likewise considered invalid. The classic example is when a person says to his wife, “The women of the world are divorced, and you, O my wife.” In such a case, his wife is not divorced. Cojoining a contract to an invalid contract renders it invalid

[Ramli, Nihayat al-Muhtaj]

Nature of the ULIP Contract

A ULIP is a single integrated contract between the policyholder and the insurance company.

This contract serves two purposes simultaneously:

• To provide life insurance coverage, and
• To offer investment opportunities through market-linked funds.

Unlike having separate contracts for insurance and investment, the ULIP bundles both together; one cannot usually participate in the investment component without also purchasing the insurance cover.

Contractual Relationship

• The policyholder is not a direct investor in the underlying securities. Instead, the insurance company manages a pool of funds and allocates units to the policyholder, representing a share in that fund.
• The insurance coverage arises from the same contract, not as a separate, independent agreement.
• Upon maturity, the policyholder receives the fund value (based on market performance).
• Upon death, the nominee receives the higher of (a) the sum assured (insurance cover) or (b) the fund value, depending on the policy terms.

I pray this is of benefit and that Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.