Life Insurance — it’s about your family, not you

Posted on: 10th October 2016 in Insurance

The Life Insurance sector in the UAE is growing at a rate of 11% a year (according to data experts timetric.com). And it’s about time this sort of growth was seen. In 2014, less than 1% of the UAE population had Life Insurance — compared to 9.2% in South Korea, for example, and 46% in the UK. Maybe us expats are too busy living to worry about dying! Maybe earning tax-free in the sun is going to our head, because what’s glaringly clear is that right now, when earnings are tax-free, is precisely the time to start laying down some serious Life Insurance provision for the future. The big question is whether Life Insurance is worth the investment. This depends on what exactly you’re trying to achieve. Be specific, and save money by buying only what cover what you need:

Do You Need Life Insurance?

In brief, the answer is “yes” if you need options in:

• Managing Inheritance Tax
• Managing funeral expenses
• Managing ongoing general family costs
• Managing investment

“I’ve managed without Life Insurance so far. Why do I suddenly need it now?” That’s what you’re thinking, right? Fair enough. But Life Insurance isn’t about you. For you, things are going to change quite dramatically in the future. That’s for certain. You’re going to pass on. You’re going to die. And whether life insurance is worth having or not depends on how you much you want to soften the financial blow of your death for other people. Life insurance isn’t about you managing – it’s about your loved ones managing to win through because you managing the financial impact of your death sensibly. And don’t forget that the sooner you start paying premiums, the more security you are effectively providing for your family in the future — one way or another. Life Insurance is, after all, a versatile tool:

Life Insurance to manage Inheritance Tax (IHT)

This is a specialist area of life insurance, but one that is very popular amongst the minority of the UK population whose estate exceeds the nil-rate band for IHT. Life Insurance can pay off any Inheritance Tax (IHT) which you come to owe on the assets you pass on when you die. This is a real bonus for your family, saving them worry at a time when they will be at their most distressed. How it works is simple. A Life Insurance policy is set up such that the arranged payout upon death matches your expected IHT bill. You simply pay in premiums throughout your life, and your family ends up reaping the rewards when you pass on. To achieve this very specific IHT function, the Life Insurance policy should:

• Be a “Whole of Life” Policy. Unless you’re a gambler or aren’t that bothered whether your beneficiaries get your assets without IHT, a sensible choice here is the Whole of Life policy. This is as opposed to the Term Policy. A Term Policy covers you for a certain “term”, or period of years. That’s great for risk management but, as an investment, Term policies are no good: after the Term, the policy becomes worth nothing: it cannot be cashed in and it pays out zero.  A Whole of Life policy, on the other hand, while being 5-10 times more expensive, guarantees a payout whenever you die. So unless you know when you are going to die (which, sadly, is a reality for some people), a Term policy isn’t the perfect solution, despite its low cost.
• Be written into Trust This means a Trust is formed to accommodate the Life Insurance policy, or an existing Trust is used. The Trust acts as a tax shelter. This is important, otherwise the policy payout becomes subject to the Inheritance Tax it is designed to deal with!

Life Insurance to manage funeral expenses

Funeral-cover-cum-life-insurance is becoming more popular. Why? Because the price of funerals — certainly in the UK — has risen by 90% in the last decade, according to the 2016  “Cost of Dying” report by influential insurers Sun Life. An average UK funeral in 2016 costs £3,897. And retail veterans of the market moneysupermarket.com report that even a modest “Extras” bill covering flowers and catering can come to another £2000+. An average funeral in the year 2022 is likely to cost in the region of £6k if the upwards trend continues. The UK funeral sector has got a life of its own independent of inflation, driven by an ageing population and fired up by aggressive retail policies by the likes of grocery retailer the Co-Op opening Co-Op Funeralcare outlets on the high street supported by online advertising. A short-term Life Insurance policy is often employed by the over-50s to cover these inevitable funeral expenses. All-in-one packages as well as tiered plans are available, offering differing degrees of cover across the areas of cremation/grave-digging, burial, funeral direction and other factors specific to the individual involved. Really important for expats to twig is that a funeral plan will cover for flying your body back to your native country in the event of your death. That’s a big hassle you can take away from your family and well worth considering. Note that payment plans differ widely, with some demanding a single lump sum upfront, and others focussing on regular premiums. Sometimes a policy involves making regular payments indefinitely until you die. This is something to watch out for. Because, as moneysupermarket.com point out, “what this means is that, if you live for a very long time, you will end up paying much more into the plan that you will get out, as the pay-out itself is fixed.”

Life Insurance to manage general ongoing family costs

Do you have dependents? Perhaps a family with a mortgage? Kids still at school? A partner who doesn’t work? If so, Life Insurance can be a way of providing for them generally when you are gone.

Life Insurance to manage investment

With some Whole of Life policies, part of the premium goes into a cash account that then grows according to “dividends, interest, and/or earnings from mutual fund-like sub-accounts.” Money from this account may then be borrowed tax-free at any time. This means you can factor your Life Insurance Policy into your wider financial picture as an investment tool; as a means of putting some money by for education/retirement expenses. There are downsides to life insurance as a means of investment. You might end up paying in even more cash if your investments start going south. And fees tend to be higher for this sort of policy.

How Much Does Life Insurance Cost?

Term Policies can be surprisingly inexpensive. As moneyadviceservice.org.uk reports, “often just a few pence a day is all you need to provide your loved ones with plenty of financial protection (depending on your age and health status).” £100,000 Term cover for a 30-year old would be likely to cost under £10, or AED50, per month. Whole of Life policies can cost ten times a Term policy.

Have You Already Got Life Insurance Without Realising It?

Your package with your existing employer might feature “death in service” benefits. If so, in the event of your death, your family might be in for a lump sum calculated as a multiple of your salary.

Pricey Though, Eh?

Whole of Life Policies in particular are attractive but wealth experts Forbes remark quite rightly that, “the benefits of using permanent life insurance as an investment can be significantly outweighed by the costs.” But what a raft of benefits on offer! Not least the peace of mind that whatever happens, your family will be OK – which you simply don’t get with Term insurance. People often try to get over the financial disadvantage of Whole of Life policies in one of two ways:

1. Get a convertible Term Policy This centres on purchasing a convertible Term Policy in early life (and benefitting from the low premiums) and then, when you get older, converting the policy into a Whole of Life policy. Naturally, this flexibility comes at added cost, with convertible Term policies more expensive than standard Term Policies generally.
2. Get a standard Term Policy and make another investment instead Buy a standard, low-cost Term Policy and spend what you would have spent extra towards a more expensive Whole of Life Policy on a separate pension scheme altogether. Depending on the specifics, this might prove a better investment for you.

Because it can be expensive, it is important to ensure that your Life Insurance links into the rest of your financial plan. Make sure it earns its keep, in other words, by tying in with your other financial products and wider strategy. That’s up to you. Get your thinking hat on before you splash out on Life Insurance and be totally clear about why you want it. Make sure you’re not just going through the motions, or you will end up wasting money as well as being vulnerable (because you don’t know what you do need) to being sold insurance features you don’t need.