Let us see the injunctions that are issued in this regard from time to time. The Quran states that whoever is involved in the usury is waging war against Allah and his Prophet (pbuh). Considering the severity of the forbiddance of the usury, we must consider carefully. As the Quran states:

يَا أَيُّهَا الَّذِينَ آمَنُواْ اتَّقُواْ اللّهَ وَذَرُواْ مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِين
فَإِن لَّمْ تَفْعَلُواْ فَأْذَنُواْ بِحَرْبٍ مِّنَ اللّهِ وَرَسُولِهِ وَإِن تُبْتُمْ فَلَكُمْ رُؤُوسُ أَمْوَالِكُمْ لاَ تَظْلِمُونَ وَلاَ تُظْلَمُون
سوره البقرة:2 , آيت:278-279

O ye who believe! Fear Allah and give up what remains of interest, if you are truly believers. But if you do it not, then beware of war from Allah and His Messenger; and if you repent, then you shall have your principal; thus you shall not wrong nor shall you be wronged.
Chapter 2, Al Baqara, Verses 278-279

فَبِظُلْمٍ مِّنَ الَّذِينَ هَادُواْ حَرَّمْنَا عَلَيْهِمْ طَيِّبَاتٍ أُحِلَّتْ لَهُمْ وَبِصَدِّهِمْ عَن سَبِيلِ اللّهِ كَثِيرًا
وَأَخْذِهِمُ الرِّبَا وَقَدْ نُهُواْ عَنْهُ وَأَكْلِهِمْ أَمْوَالَ النَّاسِ بِالْبَاطِلِ وَأَعْتَدْنَا لِلْكَافِرِينَ مِنْهُمْ عَذَابًا أَلِيمًا
سوره النساء:4 , آيت:160-161

So, because of the transgression of the Jews, We forbade them pure things which had been allowed to them, and also because of their hindering many men from Allah’s way. And because of their taking interest although they had been forbidden it, and because of their devouring peoples wealth wrongfully. And We have prepared for those of them, who disbelieve, a painful punishment.
Chapter 4, An-Nisa, Verses 160-161

يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُواْ اللّهَ لَعَلَّكُمْ تُفْلِحُون
سوره آل عمران:3 , آيت:130

O ye who believe! Devour not interest involving multiple additions, and fear Allah that you may prosper.
Chapter 3, Aal-Imran, verse 130

الَّذِينَ يَأْكُلُونَ الرِّبَا لاَ يَقُومُونَ إِلاَّ كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَلِكَ بِأَنَّهُمْ قَالُواْ إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَن جَاءهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىَ فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللّهِ وَمَنْ عَادَ فَأُوْلَـئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُون
سوره البقرة:2 , آيت:275

Those who devour interest do not rise except as rises one whom devil has smitten with insanity. That is because they say, ‘Trade also is like interest’ whereas Allah has made trade lawful and has made interest unlawful. So He to whom an admonition comes from his Lord and he desist, then will that which he received in the pass be his; and his affair rests with Allah. And those who revert to it they are the companions of the Fire; therein shall they abide.
Chapter 2, Al Baqara, Verse 275

وَمَا آتَيْتُم مِّن رِّبًا لِّيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلاَ يَرْبُو عِندَ اللَّهِ وَمَا آتَيْتُم مِّن زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُوْلَئِكَ هُمُ الْمُضْعِفُون
سوره الروم:30 , آيت:39

Whatever you lay out at interest that it may increase the wealth of the people, it does not increase in the sight of Allah; but whatever you give in Zakat, seeking the pleasure of Allah – it is these who will increase their wealth manifold.
Chapter 30, Ar Rum, Verse 39

The Quranic word for the usury or the interest is Riba which means an increment, excess or addition to the amount lent. Not every increment is regarded as usury as the money increases in the business or trading too. Such increment is called profit and the Quran allows this addition while the money added on the loan is declared illegitimate. Since this addition of money was a well known system, therefore the Quran does not expedite the word Riba’s definition and simply orders to refrain from it.

Usury system of pre-Islam called Riba al Jahiliyya, which is being prohibited by Quran as explained by Maulana Abul Ala Maudoodi in his book “Sood” was the system of lending the money for a fixed period and collecting with addition at the end of the period. If the borrower could not pay, the period used to be increased with certain increase on the capital amount. The addition used to be taken also on the price of goods sold if the buyer would not pay net. If he would buy on credit, the price would be increased. On the maturity of the agreement, if the buyer was still unable to pay, the actual cost of the goods would be increased further.

The trader buys goods, adds his profit to the cost and sells them out. This increment is his profit, which is a return of his hard work and risk taking. He is solely responsible for the profit or loss and he has to be responsible for all the liabilities thereafter. Therefore, this kind of increment is perfectly legitimate. On the other side, the lender gives the money and takes back with addition. This addition is his interest, which is a return of the time limit he gives to the borrower. The risk is not on the side of the lender as his return is guaranteed. He is not responsible for any loss or liability neither he is obliged to share it. Therefore, this kind of increment is Haraam.

Thus the definition of the Riba, in the words of Maulana Maudoodi, page 139, is that:
The fixed increase on the capital, collected against a fixed period. There are three ingredients of the Riba:
1. Addition in the principal amount or capital.
2. Increment to the additional amount fixed in advance.
3. The dealing made conditional to the two mentioned clauses.

Thus any dealing of lending money which involves the above three conditions is a dealing of Riba irrespective of its usage whether it is used for a useful purpose or for a personal need, or either borrower is rich or poor.
The question arises: does the given definition fit appropriately on the life insurance? Let us analyse.
• One: Increase in the principal amount – YES in the case of Life insurance but No in the case of General or Medical insurance.
• Two: Sum of the additional amount fixed in advance – No
• Three: The dealing made conditional to the above two – No

Firstly, it is true that the principle amount increases at the end of the maturity. But it is not necessary. If he dies or meets the accident before he pays in full, he still gets the amount insured which he, actually, had not paid.

Secondly, the life insurance contract is not a contract of loan transaction. It is buying and selling of security and assurance respectively. The 2nd party i.e. insurer, invests the policy holder’s money and when it yields profit, shares it with the policy holder. The total sum of the additional amount too is not fixed in the life insurance. Depending upon the profits, the insurer declares the dividends at the end of the year. In the cases of interest based lending and borrowing, the borrower pays back only that amount which he borrowed in addition to the agreed interest. But in the life insurance, once the insured enters into an agreement, and dies very next day, the insurer pays to the dependants of the policyholder the sum assured which is many times higher than the amount he actually paid so far. People take premium and loan as synonymous. This is the root of many misconceptions.
For example, a man insures himself for 5 lakhs Rupees on a 20 year premium contract, and pays only 20 thousand Rupees, and dies the very next day in an accident. If it were a loan, his family deserves only 20 thousand Rupees plus the interest which can never be more than few hundred Rupees at any exorbitant rate. But in Life Insurance the dependants get 5 lakh Rupees plus the premium the deceased had paid along with the bonus/profit. Therefore, the life insurance is neither a loan contract nor the excess amount paid to his family is interest. This is called the compensation for which the insured had made the agreement.

The third reasoning too does not apply to the life insurance. It takes place in bank’s fixed deposits but not in insurance. The insurance claim is not subjected to the time period but the occurrence of certain event.

Maulana Maudoodi has discussed the subject of usury in detail in a thick volume, which is worth studying. He rightly says that if the Islamic system of economy exists, the life insurance becomes integral part of the Baitul Maal. But how, when and where that system will be established and what the ordinary Muslims would do to cover their financial losses by that time, these questions are not answered.