WEALTH PLANNING AND

MANAGEMENT
MWS 4143
Topic 6:
INSURANCE AND TAKAFUL SCHEMES
2
LEARNING OUTCOMES
At the end of the topic, students should be able to,
1. Describe the various types of insurance and takaful schemes
2. Elaborate on the difference between basic policies and riders
3. Compare the differences between conventional insurance and
takaful
4. Elaborate on scholars opinions on various types of insurance
5. Elaborate on the different insurance and takaful plans and their
relevance in financial planning
6. Highlight the significant differences on the laws governing
insurance and takaful
3
CONTENTS
Introduction
Role of Insurance and Takaful in Wealth Planning
Factors affecting the need for Insurance and Takaful
Mechanisms of Insurance and Takaful
Types of Insurance and Takaful
Products Related to Insurance and Takaful
Laws and Governing Bodies of Insurance and Takaful
Revision Questions
4
INTRODUCTION
One of the important areas of wealth planning is the
distribution of the estates. Insurance and takaful are
instruments that create instant estates and hence they are
very important in the distribution of such estates
We should not forget to protect our ability to earn or
generate wealth. This can be done through insurance
and takaful
We may save money for the future but such savings
need preservation
5
ROLE OF INSURANCE AND TAKAFUL
IN WEALTH PLANNING
Insurance and takaful creates instant estates with a
small premium or contribution. It provides financial
security against premature death and disability in
the context of wealth preservation and wealth
distribution.
Death or accidents can happen any time. Insurance
and takaful can to some extent guarantee our loved
ones will have something to depend on when we are
gone or become incapacitated.
Insurance and Takaful, helps to settle debt , as well
as fund for education
6

E&Y World Takaful Report (2010)
7
FACTORS AFFECTING THE NEED FOR
INSURANCE AND TAKAFUL
Income-
replacement
needs
Funeral-
expense needs
Readjustment-
period needs
Debt-repayment
needs
College-
expense needs
Government
benefits
Existing
insurance and
assets
8
NATURE OF INSURANCE
A pays a PREMIUM to B
B promises in a POLICY contract to pay A if a
specified INSURED EVENT occurs
A is the INSURED
B is the INSURER or the UNDERWRITER
C may intermediate as a BROKER
D may RE-INSURE B against the INSURED
EVENT
9
HOW RISK IS TRADED
INSURED INSURER
No accident - 100 + 100
Accident + 900 - 900
Insure a RM1,000 PC against theft for a
premium of RM100 a zero-sum game
10
PROBABILITY WEIGHTED CASH-
FLOWS
INSURED INSURER
No accident -100 x 99%
= - 99
+ 100 x 99%
= + 99
Accident + 900 x 1%
= + 9
- 900 x 1%
= - 9
If risk of accident is 1%
11
PROBABILITY WEIGHTED CASH-FLOWS
INSURED INSURER
No accident - 99 + 99
Accident + 9 - 9
Expected revenue - 90 + 90
Insurer has expected revenue of RM90.
Community pays RM90 for peace of mind
12
EXPECTED PROFIT FOR INSURER
INSURED INSURER
No accident - 99 + 99
Accident + 9 - 9
Expected revenue - 90 + 90
Overheads - 10
Expected profit + 80
13
MUTUAL AGENCY CASH-FLOWS
INSURED INSURER
Expected revenue - 90 + 90
Overheads - 10
Repaid to community + 80 - 80
Insurer repays surplus to community.
Community pays RM10 for peace of mind
14
PREMIUM
PROFIT
PREMIUM
+
PROFIT
COSTS
SURPLUS
TO COMPANY
Conventional Insurance
100%
100%
15
100
400
1000
100
1000
+
100
700 400
TO COMPANY
Conventional Insurance
16
MECHANISMS OF INSURANCE
AND TAKAFUL
The contract mechanism
Insurance contract is one of indemnity. It indemnifies the
client from having to bear the costs of some mishap just
because the client has paid a premium to the insurance
company.
On the other hand takaful contract is not just between the
company and the participant but it is a group of participants
who have come together to donate (tabarru) a portion of the
contribution to the takaful fund which will be used to
compensate any of the unfortunate participants who face a
mishap or hazard.
17
MECHANISMS OF INSURANCE
AND TAKAFUL
According to the working committee for the
establishment of Islamic Insurance in Malaysia
the important aspects of takaful operation are as
follows:
The company does not assume the risk but it is the
various participants who mutually cover each other
The co. acts as trustee on behalf of participants to
manage the operation of the takaful business. As
such the co. does not have any right to the takaful
benefits
18
MECHANISMS OF INSURANCE
AND TAKAFUL
All contributions on the basis of donation or tabarru (premiums)
paid by the participants will be accumulated in the Takaful Fund
All payment of the takaful benefits (i.e. claims) will be paid by
the Takaful Fund. At the same time money credited to the said
fund can be invested in areas approved by the Shariah.
Should there be a profit/surplus from the operation the co. will
share it with the participants as capital providers (rabbul mal)
according to the principles of mudharabah.
According to the principles of mudharabah the party which acts
as the entrepreneur (mudharib) is entitled to a share of the
profit/surplus according to a pre-agreed ratio from the investment
of the shareholders fund.
19
TAKAFUL MODELS
Basically there are two types of products: family takaful
(life insurance) and general takaful (general insurance): eg
Takaful Malaysia and eTIQa.
General takaful business mainly deals with specific
contingencies such as fire, accident and theft. General
takaful usually is renewable annually, e.g. motor vehicles.
General takaful historically operated with the mudharabah
model but most now use the wakalah model, or wakalah-
waqf model (S.Africa or Pakistan).
Family takaful does not insure the life of the person (unlike
life insurance) but provides a lump sum payment to the
family of the deceased.
Family takaful can adopt the mudharabah model but most
operators employ the wakalah model.
20
PURE MUDHARABAH MODEL
C
O
N
T
R
I
B
U
T
I
O
N
PROFIT
CONTRIBUTION
PLUS
PROFIT
COST SURPLUS
COMPANY
X% (1-X)%
100%
PARTICIPANT
21
1000
100
1000
+ 70

700
370
COMPANY
PARTICIPANT
Pure Mudharabah
70% = 70
100-70%=30
370
22
CONTRI-
BUTION
RISK
ACCOUNT
RISK
ACCOUNT
INVESTMENT
ACCOUNT
INVESTMENT
ACCOUNT
EXPENSES SURPLUS
TAKAFUL
OPERATOR
PARTICIPANT
PARTICIPANT
PROFIT
X%
(100-X)%
100%
Pure Mudharabah For Family Takaful
23
1000
100
100
+ 7
900
900
+63
80 27
TAKAFUL
OPERATOR
PARTICIPANT
PARTICIPANT
100
70
30
27
Pure Mudharabah For Family Takaful
24
MODIFIED MUDHARABAH
CONTRIBUTION
CONTRIBUTION
PLUS
PROFIT
PROFIT
COST SURPLUS
TO COMPANY
(100-X)%
TO PARTICIPANT
100%
X%
25
100
200
1000
100
1000
+
100
700
400
TO COMPANY
TO PARTICIPANT
Modified Mudharabah
200
26
MECHANISMS OF INSURANCE
AND TAKAFUL
The relationship between the company and
the participants can also be based on wakalah
(agency) contract.
The wakalah contract is more popular now.
The co. takes the fee of managing the
business upfront and will not share the
underwriting surplus.
27
WAKALAH MODEL
Under this model risk sharing is done on a co-operative
basis amongst the participants while Takaful operator
acts as a wakil or Agent and is entitled to charge a fee
for managing the operations and a performance
incentive for better performance but is not entitled to
any share in underwriting profits which exclusively
belongs to the participants. However, if the
underwriting results show a loss the same is made good
through Qard al-Hasan raised from shareholders fund.
However, surplus distribution among the participants
will give rise to the problem of inheritance in the event
of demise of a participant.
28
CONTRIBUTION
PROFIT
CONTRIBUTION
+
PROFIT
COSTS
SURPLUS
TO PARTICIPANT
Pure Wakalah
100%
100%
FEE
29
900
90
900
+
90
700
290
TO PARTICIPANT
Pure Wakalah
90
290
100
30
MODIFIED WAKALAH MODEL
e.g.
30
Family Takaful Model
Company will charge a performance fee
Participants
Contribution
Company
Personal Risk
Investment
Account (PRIA)
Personal
Investment
Account (PIA)
Taawuni Account
Pool (TAP)
Surplus
(if any)
Investment
Funds
Investment
Funds
Profits
(if any)
Profits
(if any)
Front-end Front-end
Balance Balance
Company will charge a
surplus admin. fee
Risk & Investment Only Products
Risk Only Products
Company will charge a performance fee
31
WAKALAH WAQF MODEL
Under this model a Waqf is created by the shareholders
who make the initial donation of a reasonable amount.
The contribution made to the Wakalah Waqf fund
cannot be utilized for operational expenses but is
intended to provide relief to the participants against
defined losses as per Waqf rules and the participants
membership document (PMD).
The Wakalah Waqf Fund is held invested in Shariah
compliant instruments. Underwriting profit or loss
belongs to the fund and if needed can be utilized to pay
losses. This fund will not be used for any other purpose
than to pay claims.
32
WAKALAH-WAQF MODEL
33
TAKAFUL, INSURANCE SUMMARY
Assuming 10% return on similar premiums of RM 1,000
Similar costs, RM 700
PSR of 70:30 in favour of insured
Wakil fee of RM 100, with performance fee PSR of 70:30 in favour of insured
Modified mudharabah & modified wakalah (via performance fee) sees surplus
shared
10% 50% 50%
model premium profit costs insurer insured
conventional 1,000 100 700 400 -
pure mudharabah 1,000 100 700 50 350
modified mudharabah 1,000 100 700 200 200
pure wakalah 900 90 700 100 290
modified wakalah 900 90 700 145 245
family mudharabah 1,000 100 - 50 -
investment a/c 900 45 - - 945
operating a/c 100 5 80 25
970
34

34
35

35
36

36
37

37
38
THE RISK MANAGEMENT
MECHANISM
Risk control mechanism
When client is known to have a serious illness
such as diabetes. Steps need to be taken to
minimise claims by suggesting participant to take
medical insurance or takaful
Risk retention mechanism
Insurance or takaful co. takes up all claims and
has no recourse to claim from any third party

39
THE RISK MANAGEMENT
MECHANISM
Risk transfer mechanism
The insurance or takaful company would transfer part of
risk to reinsurance or retakaful co. The contract is
between the client and the takaful operator and the client
has now recourse to the reinsurer or retakaful operator if
they do not honour the contract
Risk sharing mechanism
They share the risk with another insurance or
takaful company under a co-insurance or co-
takaful arrangement.
40
TYPES OF INSURANCE AND
FAMILY TAKAFUL PRODUCTS
There are four major types of life insurance: term; whole
life; endowment and investment-linked
Term insurance pays only when death occurs during
coverage and no payment at the end of the term. The term
is for 1; 5; 10; 15 or 20 or even 30 yrs. This is the cheapest
and can be renewed at a higher premium. Instead of
specifying the number of years the policy is stated in
terms of age such as up to age 65 or 80 etc. and normally
there is no renewal guarantee.
The disadvantage is when there is no renewal guarantee
especially for those who are ill. In most cases there is
renewal guarantee or flexibility of changing to other
policies such as for permanent coverage so that the person
is covered throughout his life.

41
TYPES OF INSURANCE
AND FAMILY TAKAFUL PRODUCTS

Whole life insurance covers the insureds entire life or
very long terms such as up to age 88 or 100. Unlike
term insurance, whole life insurance includes an
element of savings or cash values.
Cash values represent the excess premiums that have
accumulated for their policies to date, and are refunded
if the policy is terminated before the insureds death.
The more premium dollars paid early in the the life of
the contract, the greater the cash value on policy
termination.
42
TYPES OF INSURANCE
AND FAMILY TAKAFUL PRODUCTS
Whole life cash values are determined by the method
selected for paying premiums;
A straight life contract is one where premiums are
payable as long as the insured lives.
In a limited-pay life policy premiums are paid for a
specified period of time such as 20 years or until age 65.
No further payment is required but the insured is
covered until death
Instead of paying in instalments the premium can be
paid in one lump sum and is called single-premium life.
43
TYPES OF INSURANCE
AND FAMILY TAKAFUL PRODUCTS

Endowment is another type of permanent insurance
similar to whole life. The only difference is that it
provides death benefits for a specified period of time. It
has cash values and the policy holder is paid the
contracts face value at the end of the protection period.
44
TYPES OF INSURANCE
AND FAMILY TAKAFUL PRODUCTS
Investment-life insurance contract divides the premium
into two parts: the investment account and the risk
account. The risk account takes care of the insurance
benefits but the investment account belongs to the policy
holder. Investment-linked life insurance is more risky to
the policy owners whom participates in the investment
risk, albeit with possibility of higher returns.
In the event of death the insured will get the face amount
plus whatever is in the investment account at the time.
Should the insured wish to surrender, he will get the
amount in his investment account.
45
FAMILY TAKAFUL PRODUCTS
Family takaful products are similar to investment-
linked insurance. The difference is in the contract
either wakalah or mudharabah. It has two separate
accounts: the Participants Accounts (PA) and
Participants Special Account (PSA) which is based
on tabarru. If participant dies before maturity date
he or she will receive whatever he or she has
contributed up to the date of death plus his portion
in the PSA including the profits from investment.
46
How Rates Are Charged?
Mortality Table
Such as M8388 for Malaysia
Investment Return
Long Term Duration
Expenses
Management
Marketing & Agency
Tax
Profit
47
P
r
e
m
i
u
m
s

Investment
Account
costs surplus
Profit
Profit
Operator
50% to Operator
50% to participants
M
u
d
h
a
r
a
b
a
h

c
o
n
t
r
a
c
t

b
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t
w
e
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n

Participants & Operator
50% to Operator
1
0
0
%

t
o

p
a
r
t
i
c
i
p
a
n
t
s

50% to participants
Investment
Account +
Profit
Takaful
Account +
Profit
Takaful
Account
48
Illustration of a Family Takaful Plan
Year
Premium
Paid
Investment
Account Surrender
Death
Cover
Death
Benefit
1 1,000 900 900 19,000 19,900
2 2,000 1,800 1,845 18,000 19,845
3 3,000 2,700 2,837 17,000 19,837
4 4,000 3,600 3,879 16,000 19,879
5 5,000 4,500 4,973 15,000 19,973
6 6,000 5,400 6,122 14,000 20,122
7 7,000 6,300 7,328 13,000 20,328
8 8,000 7,200 8,594 12,000 20,594
9 9,000 8,100 9,924 11,000 20,924
10 10,000 9,000 11,320 10,000 21,320
11 11,000 9,900 12,786 9,000 21,786
12 12,000 10,800 14,325 8,000 22,325
13 13,000 11,700 15,942 7,000 22,942
14 14,000 12,600 17,639 6,000 23,639
15 15,000 13,500 19,421 5,000 24,421
16 16,000 14,400 21,292 4,000 25,292
17 17,000 15,300 23,256 3,000 26,256
18 18,000 16,200 25,319 2,000 27,319
19 19,000 17,100 27,485 1,000 28,485
20 20,000 18,000 29,759 - 29,759
Syarikat Takaful Malaysia Model
9
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-
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5,000
10,000
15,000
20,000
25,000
30,000
35,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years
R
M
Surrender Death
Cover
Participants age: 36 years
Yearly premium: RM 1,000
Term: 20 years
Investment account: 20 years
Participants account: 10%
Profit rate: 5% (investment return to policy-holder)
49
Family Takaful - Individual
TAKAFUL ORIGINAL
0
5000
10000
15000
20000
25000
30000
35000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
YEAR
R
M
SURRENDER DEATH BENEFIT
CONVENTIONAL / NEW TAKAFUL PRODUCTS
-
20,000
40,000
60,000
80,000
100,000
120,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
YEAR
R
M
SURRENDER DEATHBENEFIT
Originally takaful products provided
decreasing death cover and increasing
surrender benefits.
More recently, many takaful products
are similar to conventional
investment-linked life insurance
50
PRODUCTS RELATED TO
INSURANCE AND TAKAFUL
Mortgage Reducing Term Assurance (MRTA)
or Mortgage Takaful
Fire
Marine
Etc.


TM
51
CHANNEL OF DISTRIBUTION
AGENCY & AGENTS
BASED ON COMMISSIONS
TOTAL AGENTS ABOUT 88,895 (FAMILY 55,898; GENERAL 32,997)

DIRECT MARKETING
PRACTICES BY COMPANIES
52
CHANNEL OF DISTRIBUTION
BANCATAKAFUL
OPTIMISE
NETWORKS
ONE-STOP
ANNUITY FEE
IT. MARKETING,
BACK OFFICE
ECONOMIES OF
SCALE
CROSS
SELLING
PREFERRED
CHANNEL
53
CHANNEL OF DISTRIBUTION
BANCATAKAFUL
CHALLENGES
POTENTIAL CONFLICTS OF INTEREST BETWEEN THE
SHARIAH-COMPLIANT TECHNICIANS WITHIN THE BANK
INTERMS OF PRODUCT DESIGN AND DEVELOPMENT WITH
RETAIL NETWORK

NO STAND ALONE WORKFORCE

SHELF SPACE MANAGEMENT
JOSTLE BETWEEN TAKAFUL PRODUCTS WITH CONVENTIONAL
INSURANCE AND BANKING PRODUCTS. WHICH GETS THE PRIORITY?
TO STAND OUT FROM CREDIT CARDS, PERSONAL FINANCE AND OTHER
RETAIL BANKING PRODUCTS

54
CHANNEL OF DISTRIBUTION
BANCATAKAFUL
OVERCOMING CHALLENGES
LEVEL PLAYING FIELD WITH SIMILAR SALES INCENTIVES
DEDICATED INVESTMENT TEAM FOR THE SALE OF
PRODCUTS WITH LONGER SHELF LIVES e.g. MUTUAL FUNDS,
INVESTMENT LINK TAKAFUL
WHITE LABELING GIVE OWN NAME TO THE PRODUCTS BY
INTEGRATING WITH THEIR OWN MUTUAL FUNDS TO THE
MIX
REDUCE INVESTMENT IN RESEARCH AND DEVELOPMENT
CONSTANT TRAINING OF THEIR STAFF
GENERALIST PLAYERS ON ALL ASPECT OF TAKAFUL KNOWLEDGE
THROUGH DEDICATED ON-LINE TRAINING
55

55
56

56
57
57
58

58
59

59
60

60
61

61
62

62
63

63
64

64
65

65
66
LAWS AND GOVERNING BODIES OF
INSURANCE AND TAKAFUL
The Insurance Act 1996
The Takaful Act 1984
Regulated by BNM
Differences between the two
The requirement of Shariah Advisory Council under
Takaful Act
Provision of Insurable interest in the Insurance Act to
abolish gambling elements. Takaful Act is silent on this.
Takaful Act does not require any letters of administration
to make payment to claimants.
67
REVIEW QUESTIONS
Describe the roles of insurance and takaful in
wealth planning
Explain the differences between the
underlying principles of insurance and
takaful contracts
Briefly compare the differences in the takaful
models
Explain the main differences in the life
insurance contracts
68
THANK YOU