A majority of UAE residents, being expatriates, have to head to their home countries after retirement, meaning pension plans and retirement benefits are not guaranteed. Saving or investing as a personal rule could help some, but it is not realistic to expect everyone to save diligently.
Why life insurance?
The ultimate aim of life insurance is to make sure that your dependents are not left with nothing in case of your unexpected death or in some cases critical illness. You don’t need a lot to get your family financial security, Dh40 a month is the cheapest policy we know about.
Apart from this, taking the right insurance policy out could guarantee you a decent savings nest if you start early and choose your policy wisely.
But first, let’s go through some important terminology.
Whole life insurance
The short explanation: You don’t get the money, your beneficiaries will when you die.
As the name suggests, this policy insures you for as long as you live, if the premiums are paid and the policy does not lapse. Your beneficiaries will get the entire sum assured in the case of death, dependent on policy terms and conditions.
A whole life policy can have a ‘cash value’ element in some cases.
A small portion of your premium will be put in investment, which can then earn a small profit rate after charges levied by the insurer. The amount put away along with profit earned is called ‘cash value’ which, unlike the coverage amount, is accessible to the policy holder during his or her lifetime. Beneficiaries may get the ‘cash value’ amount if the policy conditions and agreement allow for it.
The short explanation: You don’t get the money. Beneficiaries will get the money if you die within policy term but will not if you outlive the policy.
A term insurance is restricted by the term you opt for. This could be anywhere from five years to 35 years or more. The coverage is restricted to the term of the policy only.
So, if you are 45 years old and took out a policy for 5 years, the coverage ends once you hit 50. If the insured dies within the term, beneficiaries get the benefit amount.
However, if the policy expires and the insured dies after such expiry, no amount is payable by the insurance company.
Term insurance is usually taken up by people who have other outstanding personal debts to be covered during a certain time period, like a business loan or a mortgage debt.
Whole life insurance and term insurance have expensive premiums in comparison to endowment policies.
Endowment insurance policies
The short explanation: You get the premiums paid back as a lump sum if policy matures before you die. If you die within policy term, your beneficiaries get the sum assured.
An endowment policy has a payout tied to its maturity date, or death of the insured, whichever is earlier. This means that the insured can, at the end of the policy, receive a lump sum amount from the policy. The policy term ranges from 5 to 30 years and covers death, and in some cases critical illness of insured person.
The short explanation: You don’t get the money. Your beneficiaries do after you die.
Takaful insurance is the Islamic version of an insurance policy but based on Sharia or Islamic laws. Policyholders of this type of insurance ‘share’ the risk of the insured event as claims are paid out of the pool of premiums from the customers. These policies focus on maintaining Islamic restrictions when it comes to interest (riba), the element of uncertainty (gharar) and gambling (maisir).
Projected value of takaful insurance market by 2023
The market for Takaful insurance is rising and is projected to exceed $40 billion by 2023, at a compound annual growth rate (CAGR) of 13 per cent during 2017-2023.
Now, the most popular and in-demand products are those that give the best of both worlds – insurance coverage and more money. These are available for whole-of-life policies as well as policies with limited terms as short as five years. Such policies focus on investment of a portion of the premium based on the risk appetite of the customer, the returns of which add to the value of the policy and/or increases payout at the end of the term.
Why do UAE expats need life insurance?
Starting from as low as Dh40 a month, all the way up to Dh100,000 or more in a single premium, finding an insurance policy that covers life while fitting into your financial goals is possible, as we saw from our research. But do we even need it, or when do we need to get a policy?
“Life insurance is the fundamental element of an efficient financial plan. It helps you protect the most valuable asset you will ever have - your income-earning ability,” said Damodhar Mata, an independent financial advisor and blogger based in Dubai.
Ian Featherstone, Managing Director of iAE Insure in the UAE, told Gulf News: “When one has family, dependents, commitments, mortgage payments, loans, debts, business interests/liabilities and to pay for death expenses if no family members can cover….
“Everyone will need life insurance at some time… take it out when you are younger and having no health issues as the cost will be very low.”
Which is the ‘best policy’?
Now comes the difficult part for most – how to choose the ‘best policy’.
“I don’t believe there are good or bad products, I believe there are products which fit the perspective of each specific client and products which do not,” Emmanuel Deschamps, Head of Reinsurance, ERM, Actuarial, Data & Individual Life at Oman Insurance Company, told Gulf News. A policy is very subjective and largely depends on your financial goals along with your age and other variables.
Hitesh Motwani, Chief Marketing Officer at InsuranceMarket.ae, said: “The most popular kind of life insurance products that customers prefer here are those that are globally covered and portable back to their home countries or anywhere that they would migrate to in the future.
The most popular kind of life insurance products that customers prefer here are those that are globally covered and portable back to their home countries
“What is most liked by customers are ‘whole of life insurance’ policies that have protection as well as an investment component on their premiums for the long term. Customers also prefer having ‘critical illness benefit’ on their policies as these are common illnesses now faced by individuals at older ages which [could] impact their lifestyles financially.”
Questions to ask your insurer
Here are some questions, according to Motwani, that policy takers should find answers to:
- How long has the insurance company been in the region?
- Is it a global brand or local?
- Do the insurance proceeds get paid based on Sharia law or beneficiary nomination?
- What are their claim payout ratios?
- How to choose the best insurance policy for you
For UAE expats, asking the right questions is key in avoiding money traps. From premiums payable to payout options, a lot of factors should be considered before signing up.
Motwani added: “One of the most important points to consider is the time horizon [how long will the policy be running for] and also the brand and reputation of the insurance company as these plans are guaranteed and the guarantee provider must be vetted thoroughly.”
Which policy is answered by ‘why policy’, i.e. the goal of you taking up the policy.
Mata, as a financial advisor, opined that one’s income-earning ability is a valuable asset – one worth insuring. He said: “Let's assume you are 30 years old and your monthly salary is Dh25,000 amounting to Dh300,000 per year. Even if your income remains the same over the next 20 years, your total income would be Dh6 million! If you had something worth Dh6 million or more, would you not insure it?
For others, the goal might be saving up for retirement, or a specific financial goal.
According to a retirement calculator on the website of Zurich Insurance, a 30-year-old who expects to retire at 65 with over Dh2 million and starting at nothing should aim to save at least Dh5,000 a month. Out of this Dh5,000, maybe 10 per cent (around Dh500) can be saved in an insurance policy as part of a sound financial plan.
Featherstone said that $150 (Dh550) a month is reasonable for a proper well-maintained policy from a qualified advisor.
While endowment insurance policies are not as profitable as an aggressive investment plan, or as comforting as a traditional pension plan, the insured is forced to save small amounts periodically.
Such endowment plans, Mata said, are ideal for goals you cannot compromise on, like saving for children's higher education, retirement, etc. They provide a definite outcome on maturity or death; helping the insured achieve their objective either way.
He suggested two for expats:
- Participating Endowment Plan* from LIC International: It provides life cover with accrued bonus on death during the term of the plan and Sum assured with vested bonus on maturity.
- Jeevan Anand* - Whole of Life Insurance Plan from LIC International. This plan provides the Sum assured with vested bonus on maturity, and the life insurance continues for the whole of life.
Term of policy
The financial goal, again, is key here. If a UAE expat is planning to move permanently in 10 years’ time, an aggressive saving/investing payout policy can enable the person to prepare for the migration with a lump sum amount.
For expats, financial consultant Mata said, the focus should remain on earning and saving more than what would be possible in their home countries.
“Keeping this objective in mind, I usually recommend a higher allocation of income towards endowment plans with short premium payment terms [up to five years],” he added.
An example we found in the market is the Smart Invest* option from Oman Insurance Company. Premiums paid are held locked in investments for 10 years (or five years for single lump-sum premium payment) and the value of the policy accrues over the term.
Starting at $450 (Dh1,652) a month, you can spread the premium payments over two to 10 years. Or you could pay the whole premium in one go and let the money accrue value over five years.
Another product that fits into these savings and investment oriented options available to UAE residents is Wealth Plus* by MetLife.
This option allows customers to choose a goal and then work towards it with a combination of savings i.e. premiums and investments facilitated by the insurer. The plans start at $90 (Dh330) a month and you can choose to finish payments in as short as five years or go on paying until you are 95.
The premium payable is the single-most important variable in a policy because the premium you opt for should be reasonable and affordable even if you have ups and downs during the policy term. Paying your premium diligently and maintaining your policy is the single-most effective way to ensure you get the benefits promised.
“The ideal range [for short-term plans up to five years] would be between 10 per cent and 30 per cent for expats who wish to make the most of the tax-free income in UAE,” Mata said.
“For endowment plans with longer premium payment terms, the allocation should not be more than 15 per cent of income,” he cautioned.
The ideal range [for short-term plans up to five years] would be between 10 per cent and 30 per cent for expats who wish to make the most of the tax-free income in UAE
You can choose recurring premium, monthly, quarterly or yearly, if your intention is to save and earn as you go. Some people also choose a single-time premium of a lump sum amount.
Zurich International, for example, has investment-linked policies for both options – Vista*, which allows one to pay as you go, while Simple Wealth* and Wealth Accumulation Plan* allows for a one-time lump sum payment, all of which can be put into funds for investment returns. All these plans have life cover during the policy term as well.
When you stop paying regular premiums, your policy could lapse, depending on the terms and conditions – which means you stand to lose all your savings.
In some policies, you can take what is called a ‘premium holiday’ for a fee. This means your insurer will hold your policy valid during the period while you take a break from paying premiums.
The ‘cost’ of your policy
So what’s in it for the insurer? The insurer makes most of its money from the ‘cost’ of maintaining your policy and its linked schemes – through charges and fees, charged monthly and yearly depending on the policy.
You should ask, and ask again, about every fee, charge and deduction applicable from day one to the last day of the term. These charges could not only eat into your earnings but also into the savings promised.
Many policies also promise ‘early withdrawal’ and ‘partial encashment’. Most of these friendly terms come with unpleasant ‘surrender charge’ deductions on your assured cash value,.
However, credible insurers have surrender charge tables to show exactly how much the policy holder can be charged if he or she makes an early withdrawal. For instance, for policy holders of Smart Invest who can pay premium over a period of two to 10 years, the surrender charges range from 0 to 47 per cent of the ‘cash value’ of his or her policy depending on when the money is taken.
How much can I earn or how much should I earn?
As with any and all investments, earnings cannot be pre-determined. For those of who would still like to mark out the rates of return, many insurers use the cost of maintaining a policy as a yardstick for growth.
To illustrate, we are referencing a Zurich Insurance table that shows how much your money should grow, at the very least, to cover costs for each year of a Vista* policy – this means that any growth over and above this cost percentage is your earning.
If a person had a policy for five years, with a monthly premium of $300 (Dh1,101), the rate of growth would have to be at least 3.89 per cent to cover costs. Anything over and above that adds value to your policy. In the same 5-year policy, if the monthly premium is $5,000 (Dh18,350), the growth should be at least 1.31 per cent to cover costs and make money.
On the other hand, if you had a 15-year policy for $300 (Dh1,101), the growth required to cover costs would only be 1.96 per cent – as the costs are spread over a larger period of time.
According to this table, Vista* has charges including Expenses Recoupment Charge, Yearly Management Charge and Policy Fee.
So, your best chance would be to look at the funds offered for investment, historical performance of the chosen funds for as far back as you think is relevant and determine your risk based on the cost.
Your rate of return should ideally be much higher than the rates mentioned above to make any money at all. Some experts go as far as to say that one shouldn’t expect to earn a lot from insurance.
A whole of life policy should not be sold as a growing investment for retirement or future savings
Featherstone commented: “A whole of life policy should not be sold as a growing investment for retirement or future savings…. the two should be sold separately. An element of investment is included in whole of life policies, but this should be looked at providing capital in keeping the policy always active and running for life.”
This is how the insurer pays your settlement amount when your policy matures. Some policies have staggered payouts so the insured gets payment in phases before end of policy.
For instance, Alliance Insurance has Anticipated Endowment Platinum* wherein the policy holder gets 25 per cent of sum assured at every third of the policy term with the final and third payout (50 per cent plus any bonuses) at the end of the term. Such an option is great for those who are looking at major life events in the future which need a cash flow boost.
Pension or annuity policies pay out monthly or annually after maturity of policy for a guaranteed number of years according to terms and conditions.
Portability – what if I have to leave the UAE?
UAE expats should prepare for an eventual return to their home countries or other countries for retirement.
In this case, portability of the policy is critical – the ability of the policy to get transferred to the country you move to without losing coverage and benefits.
Certain companies have clauses that the customer must be a UAE resident, [while] certain companies allow for the policy to be moved to any country they move to
“Certain companies have clauses that the customer must be a UAE resident, [while] certain companies allow for the policy to be moved to any country they move to, and certain company allow the policy to be moved [anywhere] except the US depending on the type of policy,” Motwani explained.
Most insurers mention portability in their terms and conditions, but it is a question people should ask. Benefits can change or your policy could lapse if you go for a policy without a feasible portability option.
The fine print
As with all significant financial decisions, the fine print can make or break your financial future. Read every term and condition diligently asking questions at every point. Even if you sign the documents, you have 30 days, by law in the UAE, to completely back out of the contract.
Every policy that has an investment element comes with risks. Mitigate these with the power of knowing exactly where your money is spent and how.
Market conditions are never guaranteed and most insurers have options for safer investments as well as high-risk high-profit options. Asking the right questions and making the best choice for your financial goals is what can help you.
What does the law say?
UAE Insurance Authority protects policy holders and lays down directives for insurance companies in the country. By law, the policy holder is protected from misinformation and omission of details of fees, terms, etc., as the insurer is required to make sure the customer is informed. Even during the policy term, the insurer is required to inform the policy holders of any big or small changes in the conditions.
On the other hand, customers should make sure to inform insurers of details as required in case of any change in situation that affects the policy.
For example, if you move or if you lose your job (for policies contingent on employment), informing the insurer is important and is mentioned in the contract.
Free look period to decide to quit the policy with no charges
If you signed up for a policy, by UAE law, you have 30 days (Free Look Period) to decide to quit the policy with no charges (except medical underwriting charges with receipt) and no legal obligations. The 30 days start from the date the policy is active or the date the policy documents are signed, whichever is earlier, and the customer is not required to give a reason.
A prospective customer need not submit all documents before getting a suitable prospectus such as passport, visa, bank account, etc. He or she can do so after deciding whether or not to go ahead with the company.
For investment-linked insurance policies, the firm is required to provide historical performance of relevant funds (at least top five) for at least five years.
*Insurance policies are legal contracts with underlying terms and conditions as well as risks. Please read contracts carefully and vet insurance companies before making any decision. This guide is to be taken as educational and informative, Gulf News is not responsible for any loss of money resulting from misinterpretation, errors or changes in any of the above information. Please contact a regulated financial advisor or the insurance company directly to get a policy.