Life Insurance In Dubai & The UAE
What is Life Insurance?
Life Insurance is part of our Personal Insurance policies. It’s when one takes an insurance policy on one’s life for a sum of money in exchange for a premium. In other words, if someone passes away, the amount they have insured on themselves goes to the pre-defined beneficiary. The foundation of Life Insurance is to recognize the value of human life, and although human life is priceless, the policy provides some compensation for family members in the case of the passing away of the person who is insured under the policy.
How does Life Insurance work?
There are two types of Life Insurance plans:
- Protection Policies: This type is considered the most affordable type of life insurance and is designed to provide a benefit, such as a one-time payment, in the unfortunate case of death to the insured person. This is also known as Term Life Insurance and is most suitable for individuals with existing health issues.
- Investment Policies: The objective of this type of policy is to serve as a protection for the entire lifespan of a person (up to their 95th birthday). This is achieved by creating growth of capital through the payment of premiums on a fixed interval basis. This is also known as Whole Life Insurance or Variable Life Insurance.
Several variables are considered when looking at Life Insurance. These include: Age, Nationality, Gender, Family history, and the Use of Tobacco, all of which are used to determine the insurance premium.
We also consider the insured amount on the person’s life i.e. a person insuring 1,000,000 USD on their life would pay more than a person insuring 100,000 USD.
Finally, when choosing a Life Insurance policy, one has to decide on:
- Death benefit
- Premium to be paid on monthly basis
- Length of coverage – (how many years)
There are different premiums for each of the variables; Term Insurance provides life insurance coverage for a specified amount of time, and it doesn’t accumulate cash – this is considered the most pure form of life insurance where the premium provides protection in the unfortunate case of death and nothing else. It is also more affordable than a permanent policy (Whole of Life policy) and allows individuals with limited income to provide sufficient coverage for their families.
Whole Life insurance is an insurance that covers the remaining life time of the insured. This policy builds up the cash value (benefit) up to the date of maturity, and it allows the owner of the policy to access the money at a time of need.
Is Life Insurance Tax Deductible?
Single and simple question. But the answer differs based on types of plans, countries, jurisdictions, premiums or proceeds, etc. Let us look at point by point.
Generally, insurance proceeds are not taxable in most countries and jurisdictions. In the UAE neither the premium nor the proceeds are taxable for life insurance of any type irrespective of whether it carries cash value or not.
In almost all countries the beneficiaries have not levied any tax on the insurance proceeds. But if the proceeds go to the insured estate, it will be added to the total value of his estate and will be taxable if the total value exceeds the non-tax limit.
For example, in the UK, if the policy proceeds such as its cash value will be added to the estate of the insured and if it exceeds the non-tax limit, the insured or his estate will be liable to pay tax.
In India, life insurance premiums are taxed at 6%, but the proceeds are tax-free. If the tax on premiums was not paid, it will be deducted from the proceeds. Some of our clients are wondering why there is a tax deduction on the maturity value. Hope this answers their question.
In the UAE the insurance companies keep some restrictions for the US nationals. Only Term Insurance policies are available for US nationals. Because in the US any policy that has cash value may be taxable.
Expatriates in the UAE have the advantage of no tax benefit if they take a policy from here. The majority of the life insurance holders in the UAE are Indians. They are not liable to pay any tax in India for the money that comes from other countries.
How Long Does Permanent Life Insurance Last?
Technically Permanent Life or Whole of Life policy will stay live till the death of the insured. Is this policy giving insurance protection up to the age 120? The answer is NO. If we look at the average life expectancy in India stands around 74 years. Then how an Actuary can design a plan that provides insurance protection till 100 or 120?
In fact, the Whole Life policies are with cash value and the cash value is included in the coverage amount. Let us look at the illustrative quote for a whole life insurance plan. They illustrate it up to the age of 95 or 100. There we can see the cash value equals the cover amount at the age of 93 or 94. That means at the age of 93 there is no risk covered. In a whole life insurance plan, the risk carried by the company keeps on reducing as the cash is increasing. The cost of insurance is deducted only for the difference amount of Face value and the cash value. For example, if the policy’s Face value is USD100,000 and it has a cash value of USD20,000, the cost of insurance deducted is USD80,000. Because that is the actual amount of risk carried by the company.
To understand it better we can check the premium for a term insurance policy. In term insurance, the cover is provided up to the age of 84. If we illustrate a term insurance policy for a person aged 79 for 5 years, the total premium for 5 years will be equal to the amount of Insurance offered. Then what is the benefit of having a whole life plan? Essentially, we get insured for financial stability. The whole life plan provides either by insurance or by cash value. If we need money, the plan provides the option for the partial surrender of your cash value. It assures that we and our beneficiaries are free from financial worries.
What Is The Best Age to Buy life insurance? Is it Needed After 60?
Any age is a good age to buy life insurance if we have commitments to fulfill or to protect ourselves against any unforeseen situations. The amount of life cover or other benefits required depends on our standard of living, commitments, liabilities, etc. The majority of the insureds sign up for an insurance policy between the ages of 35 and 45. In that age band each one of us begins realizing that if we are not there in this world or if we are unable to earn, there are some people going to suffer in their life. They are our loved ones. We develop our dreams around them. It is painful even to imagine their suffering.
Another fear is that we are getting to the age where the probability of contracting a major illness is increasing. When we plan to insure ourselves, we must consider the age of our kids and make sure there is enough protection till they complete their education and time to find a job to live on their own. And we must consider ourselves to have enough money in case we are not able to earn but live with all the expenses and commitments. This happens if we survive a critical illness or accident. It is a fact, and we are seeing it among our known circles.
In many cases, the policy is taken without calculating the actual amount required and not adding provisions to accommodate the impact of cost inflation in the future. In most countries, the mortgage is insured from the onset. If not, we must take the initiative to insure to safeguard our assets. Many asked me: do we need insurance after age 60. We stop working at 60 and our major commitments like children’s education and mortgages are over. Now the priorities change.
As we all know life expectancy is improving and it is good news. What is bad about living longer? It is bad if our health is not good if our retirement fund is depleting and it may not survive us. If we are rich enough to pay estate tax and our beneficiaries don’t have enough liquidity to pay the tax to own our estate. In all these situations we need insurance. Discussing with an experienced insurance consultant will help us have a plan in place.
Can You Cash Out a Whole Life Insurance Policy?
This part is answered with the first question. Whole Life policies carry cash value, and it can be cashed partially or fully. Full surrender ends the policy, and no cover is provided after that. The best advice is to make a partial surrender for the required amount and let the policy stay live to provide us the essential insurance protection. Most policies allow you to add money to keep the policy live.
If we let the policy accrue cash value till the age of retirement, it can be considered an alternative to a pension plan. If such an intention is there at the onset of the policy, make a provision to have enough cash by adding more money to the premium or set a higher Face value for our policy.
What Can Disqualify You From Life Insurance?
This must be answered in two parts. Are we insurable? That means, is there any company willing to take our risk? Insurance is transferring the risk from our shoulder to the insurance company and for that, we pay a carrying cost. We all know we must be healthy to get insurance because insurance is to cover the anticipated risk, not the realised risk. Other than health, the insurance company assesses the lifestyle risk, activity risk, travel risk, financial worthiness, etc.
Our lifestyle such as smoking, drinking, sedentary life, or risky sports increases the risk. Activity includes work, political exposure, and ideologically motivated activities like participating in riots, wars or terrorist activities are worries in assessing the risk. Some of it may increase our premium, still, we get insured. But activities like riots, terrorism, too risky sports, etc totally disqualify us for insurance. Financial underwriting assesses our wealth and anticipated earnings. If the requested amount of cover is within those limits, we are eligible to get insured.
The second part is getting the claim paid after the mishap. We must know an insurance policy is designed with the help of statistics on matters like mortality and morbidity. The mortality rate is death per 1000 of each age and morbidity is the rate of sickness per 1000 people of the same age. So, to keep proper pricing of the policy and proper pay-out of the claim is of utmost importance for an insurance company and for society. We heard some claims were rejected.
What is our role in making the company reject our claims? It is our responsibility to help the company assess our risk with all available information. If a policy has been underwritten wrongly because we did not disclose all the facts and at the time of the claim process a relevant fact comes to light, the company has the right to reject our claim. Concealing the relevant information and presenting ourselves as insurable is called material misrepresentation.
Some companies offer a non-Contestability clause after a certain number of years of the life of the policy. Still, make sure we have a policy in which we made the company aware of all facts about us. We are taking insurance to have peace of mind. Let it be perfect.
Does Life Insurance Come With a Mortgage?
Life insurance cover is mandatory for mortgages in many countries, but not all. It is our responsibility to make sure the lender is not taking our assets when we are in trouble. Insurance companies are providing Reducing Term insurance for mortgages. In such policies, the covered amount keeps reducing year on year as the loan amount is reducing as we pay the installments. Reducing term insurance has less premium compared to Level term insurance because the cover keeps reducing. It is very essential to cover a mortgage. If not, in the event of not paying back, the lender has the right to attach our property to recover their money.
How Many Years of Life Insurance Do I Need?
In simple terms, we need insurance as long as we live. The commitments change, the needs change but, even if we are too rich, we need insurance to pay the estate tax to avoid auctioning our property by the authorities for collecting the tax. If our beneficiaries have enough liquidity to pay the tax, then we don’t need insurance.
Is It Legal to Have Two Life Insurance Policies?
It is very much legal to have multiple life insurance policies. Every time we apply for a new insurance policy, it is our responsibility to disclose our existing policies to the new company. It is part of financial underwriting. They assess our worth to decide how much amount of insurance they can offer. It is the cumulative value of all your insurance policies compared to our assets and anticipated earnings to determine our financial worth.
This shouldn’t be mistaken for other insurance plans like medical, Car insurance, etc. In such cases, we cannot claim twice. There the maximum claim is equal to the expenses incurred. If the medical bill is USD 5000, we can claim a maximum amount of USD 5000. Remember, insurance is not to make a profit but to compensate for the loss.
Do I Get Money Back if I Cancel My Life Insurance?
This depends on the type of policy we hold. In term insurance and reducing term insurance, there is a money back. All other types of policies carry a cash value. The policies offer cash value and may not have cashback in the initial years, commonly in the first 2 or 3 years. Again, it depends on each plan. This will be clearly mentioned in the policy document and in the illustrative quote.
Questions to Ask Before Signing a Whole of Life Policy
What is the term of payment?
There are plans where you can select payment term between 7 years to 50 years or even for the full term of the plan.
Till what age will you be covered?
Ask for the illustration for the same.
What is the Initial Contribution Period (ICP)?
- This means if you stop payment during this period your policy will get lapsed.
- Many people advise if you want you can halt after the ICP but it is wrong advice.
- If you select a payment term of ten years, then you must pay for ten years to get the full benefit of the plan.
At what percentage is the growth calculated so that it can sustain whole of life?
Most of the whole of life plans are unit-linked insurance plans and will carry the market risk assessing the exact percentage is not accurate.
What happens if I stop during the ICP and what happens if I stop anytime before I complete my payment terms?
- If you stop paying the premium during the ICP, then the policy will get lapsed. During the ICP companies may allow a grace period for 2-3 months to make the payments in the case of emergency but after that grace period policy will get lapsed.
- If you stop paying the premium before the term then the policy may get lapsed, or it will be in effect till there is a fund value, but it will not sustain till the whole of life.
- You can take premium holidays** once you complete the ICP, but if you take premium holidays during the first four years, it could affect your plans as it is unit linked plans. Please talk to your insurance provider before taking a premium holiday.
**A “premium holiday” is a provision contained in some whole life insurance policies that permit the cessation of premium payments, usually in the event of economic hardship.Premiums are paid from the accumulated cash value within the policy during this period. When the cash value has been exhausted, the policy is subject to lapse for nonpayment of premium.
Why Choose Petra Insurance Life Insurance policy?
UAE Life Insurance FAQs
- Term Insurance is the simplest and most cost-effective form of life insurance.
- It is like the pay as you go method.
- Low cost is the only attraction.
- The disadvantage is the higher premium.
- Designed to accumulate a cash value that is supposed to equal the amount of cover when he reaches age 95.
- It provides the flexibility to choose the premium payment period.
- Payment period will be between 7-50 years.
- You may choose premium based on the available budget.
- The premium will be higher if the term is lesser.
- Banks consider your insurance policy as guarantee in case of the death of the borrower.
- Collateral security in case policy holder is unable to pay back the loan.
- If there are no assets to provide as collateral security, the next option the bank will look for is an insurance policy that cover death or disability of the person.
- You may change your insurance cover at any time in the life of your policy.
- The plan provides the flexibility to increase or decrease the insurance cover.
- The premium changes in proportion to the change in insurance cover.
- It is not a reimbursement, If the client cancels the policy, they will get the cash value that accrued till then.
- This is not applicable in Term Insurance as there is no provision of cash value in the plan.
- In the whole life insurance policy, the idea is to pay off all the required premiums in a shorter period to create a fund that is supposed to pay the future ‘cost of insurance’.
- The premium is a combination of the actual cost of insurance and savings for the future.
- This savings part is the cash value in the policy.
- Please note that the cost of insurance keeps increasing as the insured’s age increases.
- The death cover is including the cash value. As the cash value increases, the actual cover decreases. When he reaches age 95, There is no insurance cover because the cash value fills in to the insurance space.
- Withdrawal of cash value is an option given to the policy holder.
- If he tries to withdraw all the money, that is surrendering the policy.
- if he makes a partial withdrawal, the policy will continue. The impact will be on the cash value.
- Policy holders can use the cash value as their retirement fund, it is the option to have partial withdrawal.
- It requires only a request from the client, and it will be done within days and the cash value will be paid if any.
- The major drawback is you are losing the insurance protection.
- The investment options in the variable whole life plans are through mutual funds.
- The return on the investment part depends on the performance of the selected funds.
- The client has the option to switch between funds free of cost.
- The client takes responsibility in the investment performance.
- Variable life insurance policies in the UAE offer diverse investment options, from local equities and Sharia-compliant funds to global markets and sector-specific investments.
- By employing strategies like diversification, regular portfolio reviews, and seeking professional advice, policyholders can effectively manage risks and optimize returns.
