What Is Investment Income Sharing?

Investment income sharing refers to profits made through the investment activities of a mutual insurance arrangement distributed to plan participants.

Investment income sharing is most commonly associated with insurance services that comply with Islamic financial rules, specifically takaful. In Islamic finance, takaful refers to a mutual guarantee.

The term is derived from the word kafala, which refers to a kind of sponsorship system. It was used as a way to monitor migrant workers and construction employees in some Middle East countries. However, the practice has come under criticism in recent years by human rights organizations that object to the exploitation of workers, which has been frequently reported.

Key Takeaways

  • Profits made through the investment activities of a mutual insurance arrangement distributed to plan participants are known as investment income sharing.
  • Takaful refers to a mutual guarantee and is used in Islamic finance.
  • Types of takaful include non-life perils, such as property, marine, and automobile insurance.
  • Family takaful can consist of life insurance policies, such as term and whole life.
  • There are various income-sharing plans in several different possible arrangements.
  • In some arrangements, income remains solely with plan participants. Other plans direct any payment back into the company.

How Investment Income Sharing Works

The traditional approach to takaful would involve a group of people who come together to provide for a particular financial need, such as insurance. Participants contribute to a common fund, and each contributor is indemnified from losses.

The approach differs from conventional insurance in that shareholders do not profit from insurance operations. Risk is shared across all takaful participants, and any profit has to be compliant with Sharia law. In this situation, no usury is allowed, so any interest rate must be fair and reasonable.

Investment income sharing allows any surplus to be shared between participants in the mutual guarantee program, though regulations require a level of separation between parties. The takaful operator can share in both the money gained from underwriting activities and the income earned from any investments made with insurance premiums.

Participants in this type of insurance contribute funds to a general fund. Any profit coming from investments is funneled back into the general fund, minus the cost of operating the fund. Then, any remaining surplus is divided between the company and the participants.

Takaful arrangement can involve a general approach or can have a family focus.

Special Considerations

Those interested in participating in investment income sharing plans can choose from several different possible arrangements. These structures differ according to how participants and shareholders in a company share a surplus from investment activities. In some arrangements, income remains solely with plan participants. In others, income is funneled into a company with shareholders. This income is adjusted for corporate management expenses, with the ultimate profit or loss divided among shareholders.

General types of takaful include non-life perils, such as property, marine, and automobile. Family takaful can consist of life insurance policies, such as term and whole life.