Wednesday 16 July 2014

The RaW Guide to... Travel Insurance (Part 1)

What is insurance? What is travel insurance? Is there really a need for it? If so, how to choose it? What is the best travel insurance for me? These were some of the questions that I tried to answer when I talked about travel insurance when I was the curator for @twt_backpacker on Twitter for 10 days in early July 2014.

As the explanation was done on Twitter, I tried to make the discussion simple and light-hearted, at times with references to, and examples using, food. The following are some of the things that we talked about, compiled based on the tweets, and translated into English for a wider audience. If you prefer to read the original tweets in Malay, you can do it here or check out #bpInsurance.

Part 1 of this topic (this blog post) covers several areas, including:

Part 2 of this topic (the next blog post) covers:
(You can just jump straight to any of the sections above by clicking on the links.)

What is insurance?

Let’s start with the basic stuff. What is insurance? Insurance is one of the ways to handle or manage covered risks which may or may not happen, to reduce the burden of the insured (financially or otherwise) when and if it happens. It’s generally not meant to replace anything, although in some cases, it does, but only to reduce the burden when any of the covered risks occur.

A simple & common example for most of us would be car/ motor insurance. Another example would be life insurance, which is obviously not to replace the deceased but to reduce the burden of his/ her close family members whom he/ she leaves behind. And then there is of course, medical insurance, which is to help cover or reduce the medical costs of the insured person.

Is insurance haram, i.e. not permissible in Islam?

Yes, there are school of thoughts that say insurance is haram, i.e. not allowed in Islam. And yes, there’s a fatwa by Fatwa Committee of the National Council for Islamic Religious Affairs Malaysia that says to this effect.

Why is it haram? From what I understand, an insurance contract is a buy & sell contract that is based on something that is not tangible and certain. In Islam, a buy & sell contract needs to have an exchange of good(s) that is tangible and certain. For example, if you buy a curry puff, you get a curry puff. It’s tangible and certain. But when we buy an insurance cover, we simply buy a cover, something that is not tangible, and the pay-out is also not certain as it depends on certain covered risks to occur. (For a more detailed explanation, read here)

So what are the alternatives for the Muslims if they want to take out insurance? Fret not, as there is takaful, an alternative to insurance that is open to both Muslims and non-Muslims alike. But why is takaful halal (permissible in Islam) while insurance is not? Are they not the same? No, they are not the same although they may appear to be the same.

A takaful contract is based on “tabarru’”, a donation that is made into a fund which is managed by a takaful company on behalf of all the contributors to help each other in the event any of them suffer a loss from a covered risk. So the contract is not a buy & sell contract. Apart from that, fund management/ investment under a takaful arrangement follows strict Islamic guidelines while under an insurance contract, it may or may not follow such a guideline.

In essence however, the bases of the contracts are not the same. Insurance = buy & sell. Takaful = tabarru’/donation. Operationally, there’re also some differences. So while the objectives might be the same, the contracts and the operations are not. Like some might say, the end does not justify the means.

Just like curry puffs. There are halal curry puffs, and there are non-halal curry puffs. Although they both may look the same and just as tantalising as each other. :)

What is travel insurance/ takaful? 

As explained earlier, insurance is one of the ways to handle or manage covered risks which may or may not happen, to reduce the burden of the insured (financially or otherwise) when and if it happens. It’s the same for travel insurance/ takaful. It is one of the ways to handle or manage covered travel-related risks which may or may not happen, to reduce the burden of the insured (financially or otherwise) when and if it happens. 

What travel-related risks are covered under travel insurance/ takaful?

Any good travel insurance/ takaful would cover at least 4 of the following travel-related risk categories:
  1. Issues prior to start of the trip – e.g. death or illness involving the insured person or close family member causing the insured to cancel his/ her trip. So what happens to all the ticket bookings and paid accommodations, if any? 
  2. Issues during the trip/holiday – e.g. Money stolen or important document like passport is lost, stranded due to some unforeseen problems, etc. 
  3. Transportation issues (particularly flight) – e.g. flight got cancelled, delayed, missed connection, etc. If our flight is cancelled or delayed, we might also incur a loss from maybe booked/cancelled accommodation.
  4. Medical/emergency issues during the trip – e.g. if in need of a medical treatment (the cost of which can be exorbitant in some countries) while travelling, or a family member suddenly dies back home you need to cut short your trip and fly back home.
These are just some simple examples of travel-related risks that are covered by any good travel insurance/ takaful. The types of risks covered are wider but they generally can be categorised under these 4 categories. 

So have I still got your attention or are you guys still thinking about curry puffs? ;)

Does one really need to get a travel insurance/ takaful? Is it compulsory? 

Whether or not one needs a travel insurance/ takaful, it really is up to each individual. Travel insurance/ takaful only helps when there’s a need for it. If we “feel” that nothing is going to happen that is going to affect our travel plan, then there’s no need to take it up. But do make sure that we can afford it when and if things go wrong. (This is actually a form of insurance as well. It’s called self-insure. Managing risks using your own money. Like I explained earlier, insurance/ takaful is just one of the ways or mediums, not the only way to manage risks.) 

Just like curry puffs. Even though it is nice, it’s not the only nice kuih that is available out there. :) We can choose to manage risks in our own way. And we can also choose to ignore or not think about those risks at all. Insurance/ takaful only helps to reduce the burden when and if something happens. When and if.

Still, wouldn't it be a waste if nothing happens?  

Travel insurance/ takaful is not that cheap at times, right? Well, this is where taking takaful instead of insurance could be an advantage. Takaful funds are managed on the basis that they belong to the contributors so if there are any surplus, contributors which have not made any claims should get something in the form of a rebate. This might be too technical to discuss here but think of it something like No Claims Bonus/ Discount for your car/motor insurance/ takaful. 

Travel insurance (as opposed to travel takaful) may or may not have this feature. That’s probably why many think that it’s a waste if nothing happens. Besides, the basis of a takaful contract is tabarru’, i.e. donation to mutually help each other among all the takaful contributors. So if you’re a Muslim, I’m sure you’d believe in some form of a reward for the good deed, whether in this world or in the hereafter. Non-Muslims on the other hand may think of this as good karma.

Continue to Part 2.


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