Is a Pension Survivor Benefit with a No-Refund Clause Permissible?

Answered by Shaykh Muhammad Carr

Question

Federal employees can enroll in a Spousal Survivor Pension Plan, distinct from a 401(k). Under this plan, the employer deducts 10% from the retiree’s monthly pension. In the event of the retiree’s death, the surviving spouse receives 50% of the retiree’s pension for the remainder of their life.

However, if the spouse passes away before the retiree, there is no refund of the deducted amount. In such a case, the retiree may stop future deductions, but the amounts previously deducted are not reimbursed.

Answer

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

I pray you are in good faith and health. Thank you for your question.

Suppose the insurance model complies with Shari‘a principles. In that case, it is permissible to participate in a pension scheme whereby ten percent of the retiree’s monthly pension is deducted to ensure that the surviving spouse receives fifty percent of the pension for the remainder of their life.

In a Sharia-compliant model, the beneficiary contributes to a takaful (mutual assistance) fund. A payout is only granted when the specified contingency occurs. Naturally, if the covered risk does not materialize, the insured has no entitlement to any claim. In your case, it is the retiree’s passing before his or her spouse.

You must consult a certified financial planner for optimum fund management and avoid mis-selling.

Mis-selling

Mis-selling occurs when a financial product (like insurance, investment, or loan) is sold to a customer in a deceptive, unethical, or inappropriate manner. This includes:

• Selling a product that the customer does not need,
• Selling a product that the customer is ineligible to benefit from, or
• Failing to adequately disclose the product’s terms, risks, or costs.

Shari‘a Compliant Insurance

Insurance, defined as implementing measures to protect against potential future risks or hazards, is firmly grounded in Sacred Law. Just as risk is an inherent aspect of daily life, safeguarding ourselves against such risks is equally natural and normal.

The crucial aspect lies in the method used to address these risks. Contemporary scholars generally agree that cooperative insurance, based on the Takaful model, is permissible.

Cooperative insurance occurs when a group of individuals mutually assist each other by contributing to a fund to compensate for the loss or damage caused by a hazard that could affect any one of them. [Karan, Medical Insurance]

A group of persons enters into a partnership; each individual contributes a specified amount; whoever is afflicted by any calamity is assisted from this collective fund; thus, each individual is considered an insurer and insured. [Ibid.]

The nature and relationship between the contracting parties are the most important aspects of cooperative insurance, most notably distinguishing it from commercial insurance. In a cooperative format, as stated previously, the legal roles of the customer and owner are united in one form: “members.”

And with Allah alone is our success.
[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 benefited 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.