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Life can often be uncertain. And when emergency strikes, nobody would want to leave their family in the lurch or make them run from pillar to post to pay off their outstanding debts or worry about their children’s education.
To prepare for life’s uncertainties, every earning member of the family and people with dependents and responsibilities should have a term insurance cover to ensure their families remain financially secure in an unfortunate event of their untimely death.
Residents in the UAE have access to various domestic as well as international term insurance schemes. But before choosing a term insurance policy, we should understand a few things about it to make an informed decision.
What is term insurance?
Term insurance is a simple contract where an insurance company pays a promised sum, say Dh1 million, to the family or a nominee in case of the insured person’s death.
Essentially, a person takes an insurance cover by paying a premium — the cost of taking the policy — for a specified number of years, say 20 or 25 years. The person typically pays this amount every year to keep the policy in-force.
In the unfortunate event of the person’s death before the expiry of the policy, the death benefit will be paid out to the beneficiary and the policy stops. The premium depends on various factors. These include:
> Age of the insured. Younger the person, lesser would be the premium;
> Current health condition of the insured person;
> Your Profession or daily activities, For E.g., Working in Offshore rigs, armed forces, etc,.
> Sum assured, or the amount that the nominees get on the demise of the policyholder;
> Number of years the policy will cover the insured person. The longer the duration, the higher the premium;
> Lifestyle habits of the insured such as smoking or adventure sports. So, if you regularly like to go skydiving over The Palm or zipline at Ras al Khaimah, the premium may be higher.
However, let us be clear that the payout in term insurance is made only in case of the demise of the insured.
So, why is it important?
Why term insurance
Term insurance offers the highest cover at the lowest premium and hence is the most sought-after scheme if a person is aiming to protect the family’s financial well-being in case of an unforeseen death or accident.
It is true that if a person outlives the period of term insurance, there is no payout, but the rock-bottom premium more than makes up for that.
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When to take term insurance?
It is best to take term insurance at an early age as premiums rise with age. One should take a term insurance just after landing a job or starting a business and certainly before starting to invest in savings schemes.
Taking term insurance early creates a financial cushion for your parents, who would be getting closer to their retirement or already retired. Also, closer to marriage, another term insurance is suggested to safeguard the financial well-being of your spouse or kids. The duration of this insurance policy would have to be much longer.
How much?
The amount of cover should be enough to cover all the current liabilities, plus all possible expenses of the family till the term of the policy and any additional emergency expenses they may face.
Also, don’t forget to factor in inflation when calculating the sum assured.
The factors to keep in mind when deciding on the amount of cover to take in term insurance are:
> The current annual expenses of the family;
> Any current liability like home loan;
> The rate at which annual expenses will rise keeping in mind school/college fees of kids;
> Number of years it will take for your children to be on their feet;
> Any extra amount you would like to provide your family for emergency expenses.
For how long?
The duration of the term plan should depend more on the age of the beneficiaries rather than the insured. If the nominee is young like children, then the term should last until they can stand on their own feet financially. Similarly, in case the nominees are your parent, you should consider their age and make sure they are always provided for.
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Which term insurance?
1.Basic or level-term insurance
The most popular of all term insurances, level-term insurance allows for a fixed cove rage at a pre-determined premium. The sum assured and premium stay same throughout the life of the policy. There is no payout except in case of death of the insured. Or unless you have subscribed to supplementary riders
2.Return-of-premium plan
Since some people are uncomfortable with the fact that they may outlive their term insurance policy, some insurers have introduced the return-of-premium plan. In this, if the insured outlives the policy, the total or a part of the premium paid is returned to the person. Of course, the premium amount will be much higher than level-term insurance.
3.Increasing term insurance
If a person expects the amount of cover needed to increase in future then increasing term insurance would be a better idea. The amount of cover will rise at dates set at the start of the policy. It helps cover for inflation, kids etc., that may inflate the amount your family may need in future.
4.Decreasing term insurance
These are mostly used to protect against mortgages where the sum cover decreases every year based on an amortization table.
Riders
Term insurance offers several riders such as terminal illness, critical illness, permanent or partial disability, income benefit, waiver of premium and child support. Riders provide for extra money in cases other than death, such as disability from an accident.
It is a good idea to take these riders, as in situations like these the family needs a lot of money to tide over the crisis. This will raise the premium, but it is better to be prepared for such situations.
Summing up
The policy cover, riders and the terms must reflect your lifestyle and health. For example, if you have history of critical illnesses in your family, you must take the relevant rider. And, if you are into adventure sports, you should make sure that the terms and conditions of the insurance policy cover for that aspect.
You can look for term insurance plans on www.policybazaar.ae, and compare them as per your need. Apart from the premium-to-cover ratio, you can also scan the riders provided by each and their cost. Our service agents will be available in case you need any clarification or assistance in deciding.
Joseph Terrance is Life Insurance Business Unit Head at Policybazaar.ae. Views expressed are his own and do not reflect the newspaper’s policy.
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