Challenges and Opportunities
Studies in Islamic Finance, Accounting and Governance series
Edited by S. Nazim Ali and Shariq Nisar
Chapter 11: Shari’ah-compliant high watermark protected lifetime annuity in family takaful?
There is a demand for conventional unit-linked life insurance and investment products that not only pay out death benefits or a lump sum at maturity but provide in addition a protection of the invested capital, a guarantee to redeem the units of the fund at maturity at the highest net asset value that the fund has reached over its lifetime (= high watermark), and an option to convert the lump sum into a lifetime annuity. The chapter explores whether such a product could be structured in a shari’ah-compliant manner. Major shari’ah compliance issues are related to the use of stock options that are applied for the capital protection and high watermark guarantee in a conventional setup. But if these issues can be overcome, the operational structure for a shari’ah-compliant alternative would not be very different from conventional patterns. However, the conversion of a lump sum into a lifetime annuity requires a more complex institutional arrangement with a cash waqf, or alternatively a shari’ah-compliant trust, at its core. The overall conclusion of the chapter is that a shari’ah-compliant capital protected high watermark fund with a lifetime annuity option can be structured as a family takaful product. The chapter does not cover market potentials or regulatory aspects.
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