Is life insurance required in the United Arab Emirates? It’s compulsory for anyone with a home loan or a mortgage. The rest of the population is not legally compelled to have life insurance in the UAE. That said, even if you’re not required to have life insurance, consider taking one out anyway.

Now, deciding on a life insurance policy requires that you understand the available options and assess them against your needs and goals. This article breaks down the different types of life insurance plans and what factors you must consider when deciding on a policy.

The Different Types of Life Insurance

Life insurance generally falls into three categories:

1.     Term Life

Term life insurance has a coverage period of one, three, five, 10, 20, or 30 years; the term of coverage can be anything. If the insured dies during this period, beneficiaries receive a lump-sum payout equivalent to the death benefit specified in the insurance contract.

Term life insurance is for those who want value for money. Compared to other types, term life offers a greater death benefit per dirham of premium – i.e., a relatively lower premium for a considerably higher death benefit.

Furthermore, it’s suitable for those who need temporary coverage. Someone with a 15-year mortgage can use a 15-year term life insurance as a financial planning tool.

2.     Whole Life

Whole life insurance is distinct from term life insurance. Whereas the latter provides coverage for a set term, the former provides coverage for life. It has fixed premiums, and as long as premiums are paid, the policy remains active.

Whole life policies provide a death benefit and accumulate a guaranteed cash value over time. The cash value component grows at a tax-deferred basis, and growth is guaranteed. Policy owners can use their cash value, withdrawing or borrowing against it, as needed, depending on the policy terms. Some even provide non-guaranteed dividends.

If the insured passes away while the life insurance is in force, the beneficiaries will receive the policy’s guaranteed death benefit plus the cash value that has accrued in the account.

The savings component and guaranteed benefits of whole life insurance make it more expensive than term life insurance. That said, it can be an effective tool for estate planning, retirement planning or even wealth transfer.

3.     Universal Life

A universal life policy is similar to whole life insurance. It has both a death benefit and a cash value component. However, it does not guarantee cash value growth.

The cash value is linked to an investment account, and its performance (growth or decline) is therefore tied to market conditions. In other words, the cash value can grow exponentially, but a bad turn can wipe it out.

Universal life insurance is flexible because the policy owner can modify the death benefit and increase or decrease their premiums, subject to policy terms. They may even stop paying premiums and keep the policy active if they have sufficient cash value to cover premium payments.

Universal life has lower premiums than whole life because it doesn’t guarantee cash value. However, it is highly flexible, so it’s ideal for anyone who predicts they’ll have evolving financial needs or wishes to gain exposure to asset and investment markets.

How About Critical Illness Insurance?

Critical illness insurance is not life insurance per se. In fact, strictly speaking, it is a type of medical insurance. It pays a lump-sum benefit (or a series of lump-sum payments) if the insured is diagnosed with any of the policy’s covered critical illnesses. This type of plan is often available as a rider to life insurance policies.

Choosing a Life Insurance Policy

When choosing a life insurance policy, assess your needs and financial capacity. Specifically, consider the following:

• Coverage: How much coverage do you need? If you’re getting term insurance to pay off a mortgage, calculate the amount you’ll need to pay off your loan today and get a policy that pays at least as much as that. If you need life insurance to pay for your child’s college education, compute how many years you have to save and how much you expect college to cost. The former will give you the amount of time you have to grow your cash value, while the latter will tell you how much you have to save.
• Policy Duration: If you have a 20-year mortgage, get a life insurance plan with a term of at least 20 years.
• Capacity to pay: Opt for a premium you can afford without straining your finances. You don't want to miss your premium payments.
• Additional riders: Consider adding optional riders to your insurance plan to expand your coverage or add more benefits, such as disability and critical illness coverage.

Understanding Life Insurance

Life insurance can be term life, whole life or universal life.

Term insurance provides high coverage for relatively low premiums, whole life provides security and savings, and universal life offers unparalleled flexibility.

Deciding on which type to get and which plan to choose from what your insurance company in the UAE offers requires an assessment of your needs and financial capacity.