If a person dies and his heirs receive some money from his life-insurance, is it permissible for them to keep it?

Commercial insurance of all types is haraam, because it involves riba, gambling and ambiguity, as we have explained in the answer to question no. 8889. The Muslim should avoid it as much as he can. But if he cannot do that, and he is obliged to take out insurance, then he is entitled to take of it as much as he paid in; if there is anything more than that, then he has to get rid of it by spending it on charitable causes. 

This is what is to be said to the owner of the money, and this is the basic principle with regard to the ruling on this issue. 

But it is a different matter when the money is transferred to the heirs, provided that the money is not haraam in and of itself; rather it is haraam because of the way in which it was acquired. This includes what the question is asking about here, which is acquiring money as a result of an insurance contract. Riba, gambling and ambiguity have to do with the money that is haraam because of the way in which it is acquired; the money is not haraam in and of itself. If the money is haraam because of the way in which it is acquired, the sin is only on the one who acquired it and there is no sin on the one who engages in a transaction with the one who acquired it, such as buying, selling, gift-giving, or hosting a guest. 

The evidence for that is the fact that the Prophet (blessings and peace of Allah be upon him) used to engage in transactions with the Jews in Madinah, buying and selling, and he used to eat with them, even though Allah, may He be exalted, had described them as consuming riba and taking people’s wealth unlawfully. 

Based on that, when this money that was acquired by haraam means was transferred to the heirs, it became halaal for them. This is the view of the Maalikis and was regarded as more correct by Shaykh Ibn ‘Uthaymeen (may Allah have mercy on him). 

Al-‘Allaamah Muhammad ‘Ulaysh al-Maaliki (may Allah have mercy on him) said: There is a difference of opinion concerning wealth that was acquired by haraam means, such as riba and invalid transactions. If the one who acquired it in that manner dies and leaves it behind, is it permissible for the heirs – which is the correct view – or not? As for wealth that is haraam in and of itself, and its rightful owner is known, such as wealth that was stolen or taken by force, it is not permissible for the heir.

End quote from Manh al-Jaleel Sharh Mukhtasar Khaleel (2/416) 

Shaykh al-‘Uthaymeen (may Allah have mercy on him) was asked: 

If a person inherits wealth from someone, and he knows that part of this wealth, such as ten thousand or twenty thousand – is obviously haraam riba, but he does not know about the rest, or it is mixed, then what should he do with the riba that is obviously haraam? 

He replied: There is nothing wrong with it, and it is halaal for him, because he took possession of it in a permissible manner, namely inheritance. But if you know that this is the property of a particular person, and that the deceased took it by force, then in that case it is not permissible for you. But if it was haraam because of the way in which it was acquired, such as riba and the like, then in this case there is nothing wrong with it.

End quote from Liqaa’aat al-Baab al-Maftooh (213, question no. 12) 

We have stated that previously on our website in several answers. Please see the answers to questions no. 20709, 39661, 85419 and 87747

Thus you will know that this wealth that the company gave to you should be divided among the heirs of your brother according to the shares of inheritance allocated to them by sharee‘ah. Hence you may ask permission to borrow or use the money from its rightful owners. 

Please see also the answer to question no. 180521

And Allah knows best.