What is a Life Annuity Takaful and why the
Annuity products are not available in Takaful industry?
Today, we observe great concern with respect to health-related issues
within the community. In addition, there
have been significant improvement in medical facilities offered to the public
and easily access to a better quality of life.
As a result, most part of the world are observing increasing life
expectancies among their population in recent years.
Consequently, there is a need to provide retirement products that will
cater for a stream of income upon retirement and old ages. The income is meant to sustain certain level
of lifestyle which may not be equivalent to pre-retirement period but at least
provides a comfortable life.
Life
annuity is a concept of a series of future regular payment to be paid by
Takaful operator commencing from a particular age as an exchange of an
immediate lump-sum payment or series of regular payment. This is usually offered by Takaful Operator
to cater for retirement benefits to their participants. Nevertheless, life annuity is not allowed by Shariah
due to uncertainty element of the number of future regular payment therefore it
is replaced with Annuity Certain with specific number of years specified for
future regular payments. For instance, a
person aged 40 participates in an Annuity Certain Takaful of 20 years term
commencing from aged 55. He has the
option whether to pay a lump-sum contribution at inception or regular
contributions till certain age. Upon
reaching 55, Takaful operator will commence paying him a regular payment as
agreed earlier for 20 years ahead. In
the event of his death, the balance of future payments will be made to his
beneficiaries or as allowed by Shariah laws.
Nevertheless, there are several challenges
facing the takaful annuity business which hamper their development as follows:
Lack of suitable sukuk
Annuity business require a suitable investment
instrument which can generate a stream of regular income to match the annuity
payout to participants. As the payout
liability is a long term commitment usually 10, 20 or 30 years, the investment
instrument shall be a long term duration.
The most suitable instrument to meet with the above criteria is sukuk or
Islamic bond.
Unfortunately,
the offering of long term sukuk is very scarce and limited as most sukuk
offered are short to medium term in nature.
Moreover, the offering of sukuk is easily fully subscribed by the bigger
corporations such as Islamic banking.
As such, most takaful operators are hindered
from venturing into the annuity business.
Issues with product features on annuities
One of the features of annuity product is the
guaranteed future income payout. This
guaranteeing of future benefits are not acceptable to some Shariah scholars. Besides, the future guaranteed benefits may
resulted in deficit in the fund to cater for the liabilities. In the event of deficit, Qard (interest-free
loan) may be required from shareholders to rectify the shortfall. As it is a loan, then the question on how to
recover the amount for shareholders emerge.
Issues of
permissibility
Some Shariah scholars are of the opinion that the tabarru’ contributions
from takaful fund can only be used as benefits to participants who suffer
financial loss or misfortune arising from pre-defined events. However, takaful annuity pays out the
benefits to the participants as a result of survivorship without any financial
loss or misfortune occur. Thus, the
nature of takaful annuity benefits contradict with the Shariah requirement for
benefits payout from the takaful fund.
Impact of
Risk-based capital (RBC)
It is mandatory for Takaful business to comply with RBC
requirement. Due to the nature of the
annuity product of guaranteeing future benefits, meeting the RBC threshold may
result in additional capital requirement.
In the end, annuity products will be priced slightly expensive to cater
for RBC requirement and making the product less attractive to the potential
customers.
Due to the above challenges, takaful as well as conventional insurance
are not very keen to offer such product to the market nowadays.
