Loans, Tawarruq, discounting, financing of business : return on 401 K account, and permissibility of insurance

Fatawa Question

Dear Dr. Monzer, Assalamu Alaykum Wa Rahmatullahi Wa Barakatuh, Following is a financial question about a student loans and insurance accounts I live with my family in the USA. My wife and I are currently repaying our student loans which are of course interest based loans. I have a 401 K account and my initial thought was to contribute to my account for a while and benefit from the dollar for dollar matching by my company and the returns on the account. My plan was to withdraw the money from the account to repay my debt once I have sufficient money (I am aware of the 35 % penalty to withdraw 401 K money). My logic was since I am not sure how Shari’ah compliant is my 401 K investment, I can use the money to repay a loan that bears interest and thus I am not going to live off this money but rather use it to get rid of debt. My wife is in a similar situation as she has student loans and owns a life insurance account that pays her dividends at the end of each year. Her parents purchased the account when she was a child and after she converted to Islam a while back we started thinking of taking the money out of this account. Our logic of how to use the insurance money is similar to what I have mentioned about the 401 K as we are thinking to use the money in the insurance account (plus dividends) to repay our loans. My question is : since the investment returns from the 401 K and insurance accounts are not Shari’ah compliant, can we still use them to repay our student loans or should we withdraw our money from the accounts, only keep the principal and donate the returns on the accounts ? Jazakum Allahu Khairan for your constant help Yours, Muhammad

Fatwa

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Publication Date

2009-04-17

Main Subjects

Financial and Accounting Sciences
Islamic Studies

Topics

• Islamic jurisprudence
• Insurance

No. of Pages

2

Data Type

Fatawa

Language

English

Record ID

BIM-729686

• APA
• MLA
• AMA