Finance charge on home and vehicle insurance

I have a question regarding vehicle and home insurance.

I live in Canada, most of the insurance companies here give two options :

1. pay the whole years insurance

2. or pay it monthly and they add a 3% finance charge or a service fee to the amount.

For eg. if I pay the whole year’s insurance it will be $4580 and if I pay monthly it will $393/month

and that comes to $4716/year.

So is this considered interest?

There is one company which does not charge the finance fee but their insurance is costing more

it is $5280/yr divided monthly to $440/month with no finance charges.

I was thinking of switching to the company that charges less if the finance fee is not considered as interest charges.

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Your desire to adopt a halal course of action is encouraging. Adopting halal invokes the mercy of Allah Ta’ālā and barakah in your wealth.

At the outset, it is important to point out that all forms of insurance are prohibited and unlawful[1]. Insurance is prohibited due to the following reasons:

1. 1.      Qimaar (gambling)-The Insurance Company may receive more than the insured monies or might not receive any amount of money. This is the same as gambling. 
2. 2.      Riba (Interest)-If the Insurance Company receives premiums worth more than the value of the insured property, vehicle etc. Then that will be usury and interest. If there is any loss to the insured person’s property, vehicle, etc. And the loss is worth much lesser than the total premiums that he has paid to the insurance company, such a person would be guilty of undertaking a usurious and interest based transaction.
3. 3.      Gharar (Future Uncertainty)-The obligation of payment from the side of the insurance company is based on a future contingency, i.e. obligation of payment. This is termed as gharar in Shari’ah.

However, in certain countries, namely USA and Canada it is required by law to have vehicle insurance. In such a situation one will be excused and he may take out a conventional insurance scheme[2]. One must make tawbah and istighfaar and ask Allah to save him from the evil consequences of the haram.

In the enquired situation, it will be permissible to opt for the second option. That is, pay monthly for the insurance with the addition of a 3% service fee. This service fee will be added to the total monthly payment and will not be regarded as interest[3].  

And Allah Ta’āla Knows Best

Abdullah Ghadai

Student Darul Iftaa
Michigan, U.S.A

Checked and Approved by,
Mufti Ebrahim Desai.