Insurance is a relatively new contract, and Muslim scholars differ on its permissability. There are many scholars who believe that if insurance is not interest-based, it is permissible provided that the subject of insurance is also permissible.

Dr. Monzer Kahf, a prominent economist and counselor, stated,

“Insurance is a controversial issue among Muslim jurists. I go along with the view that sees it permissible with conditions. As a contract, it is a relatively new contract that in itself does not violate any Shari`ah principle. Hence, the conditions are: It must not be interest-based, and the object of insurance must be permissible. These two conditions are satisfied in house, health, car, and most life insurance contracts. The only problem comes in some kinds of life insurance contracts whereby interest is in the core of the contract (what is known as whole life insurance, which is the most common any way). It also comes in insuring certain prohibited things such as insuring a shipment of liquor.

On the other hand, there are scholars who argue that the insurance contract contains a great deal of gharar (Arabic for: due uncertainty) that makes the contract invalid. These argue that this gharar shall be forsaken if we change the structure of the insurance contract in question, making it a cooperative that receives premiums as donations. Based on this argument, Islamic insurance companies are founded.

When such companies are available, it is of course better to deal with them because they are acceptable by all. They also offer another benefit that it invests only in ways that are permissible in Shari`ah.