Answered by Shaykh Muhammad ibn Adam al-Kawthari
In the name of Allah, Most Compassionate, Most Merciful,
If the death benefit scheme operates in the manner you have explained - in that one pays annual premiums to a company and if one does not die, the premiums paid are lost, but in the event of one’s death, the company pays for all the funeral and burial expenses - then this will be considered a form of insurance, hence unlawful.
All prevalent forms of insurance are unlawful due to the fact that they constitute riba, gambling or both. The return on the premiums paid is contingent on one’s death which in effect is chancing and gambling. One may lose all the premiums paid or receive more than what was paid in the event of death occurring in the first year. Similarly, one may be paying a less amount as premiums and receiving more in return, which is Riba.
However, if the death benefit scheme operates in a different manner such as the death benefits paid by the pension fund, then the ruling would be different. A contribution to a pension fund is deducted from the employee’s salary, and the employer also makes some contribution towards the fund. When the employee dies, the fund pays death benefits to the dependants of the deceased, normally the surviving spouse and children.
This type of death benefit is Halal, as one is receiving back one’s own money and there is no gambling involved here. Similarly, the contribution made by the employer is considered to be a gift. However, one must ensure here that the money was not invested in any unlawful trading, for any profit made on Haram investment would not be lawful.
And Allah knows best
Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK
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