Do you need life insurance? We have all heard or been part of this debate, and our short answer is, ‘Yes, you do.’ We discuss the long answer in greater detail below.
First, we answer the question, ‘What is life insurance?’ Next, we discuss the two primary benefits of life insurance that underscore why a life insurance policy is essential to financial security.
What Is Life Insurance?
Life insurance is a contract or a legally binding agreement between two parties:
The policyholder: The policyholder owns the insurance policy and pays the insurance premiums.
The insurer: The insurer is the insurance company that underwrites the agreement (i.e., takes on the financial liability entailed by the life insurance contract).
Two other ‘persons’ are involved in life insurance, although they may not be active participants. They are the following:
The insured: The insured is the person whose life is covered by the policy and whose death will trigger the insurer’s financial liability. In most cases, the insured and the policyholder are the same person.
The beneficiaries: The beneficiaries are the named recipients of the policy’s indicated life insurance benefits. In most cases, they are the insured’s spouse, children or immediate family members.
What do the policyholder and insurer agree to do? Life insurance policies bind the parties to the following:
Premium payments: The policyholder commits to paying the insurer a predetermined amount of money at regular intervals. These are insurance premiums, typically payable monthly, quarterly, annually, or at some other agreed-upon interval. Insurance premiums can be fixed or they may increase according to a preset schedule.
Death benefit: In exchange for the premiums, the insurer agrees to pay the beneficiaries a monetary benefit (i.e., the death benefit) upon the insured’s death, subject to specific terms. The death benefit can be a fixed lump sum or a variable amount.
Insurers are liable to pay the death benefit only if the insured dies while the policy is in force. This typically means the premiums are paid and up to date. Additionally, insurance policies have cause-of-death inclusions and exclusions. Typical inclusions are natural causes and accidental death; death while engaging in hazardous activities is usually excluded.
There are several types of life insurance. Two of the most basic types are simple life and term life.
Simple life: In simple life insurance, the premiums are fixed and do not change, and the policy is usually in force throughout the insured’s life (may be up to a certain age) as long as the policyholder continues paying the premiums. Simple life insurance pays a lump-sum death benefit.
Term life: Term life insurance also pays a lump-sum death benefit as long as the insured’s death occurs due to a covered cause while the policy is active. However, term life insurance has a fixed term; our insurance term can be from one to 35 years long. During the term, the policyholder pays fixed premiums. However, once the term expires, the policy will lapse, although some term insurance policies can be renewed for an additional term with higher premium payments.
Term life insurance policies typically offer a more substantial death benefit than simple life insurance. Your term life premiums can buy more protection than equivalent simple life premium payments.
However, simple life has the benefit of continuous, lifetime coverage as long as you keep premium payments current. It also locks in premiums at a lifetime low rate, while term insurance can mean significantly higher premiums with every term renewal.
The Benefits of Life Insurance
Why buy life insurance? There are two primary reasons. The following benefits of life insurance make it essential for financial security.
1. Protect your loved ones from financial ruin.
Life insurance cushions your loved ones from the financial consequences of your death.
Suppose your income pays for the food on the table, your bills, your children’s tuition, and your mortgage. If you die, your death will not only be emotionally but also be financially devastating for your loved ones. They will lose not only a beloved family member but also their sole or a significant source of income.
Life insurance ensures your family will not suffer financially if you die. The death benefit will give your family members time to grieve, plan and become sufficiently capable to fill the financial gap you leave behind. In other words, life insurance will help your loved ones retain their lifestyle and protect them from the economic hardships that can arise from losing you and your source of income.
2. Leverage money and time.
Life insurance allows you to leverage a small amount to get a large death benefit and provides immediate protection for your loved ones.
Some people will argue you don’t need to buy life insurance. They will tell you to deposit your premiums in a savings account. This way, you can keep your money instead of paying them to an insurance company.
Well, here’s the thing. If you’re a salaried employee who earns AED 25,000 per month, saving all your salary without spending anything will accumulate you AED 300,000 in one year. While that is a good amount, your savings do not compare to the death benefit paid by life insurance policies.
For instance, our simple life insurance can pay up to AED 3.6 million. Meanwhile, our term life insurance can cover your family up to $50 million – approximately AED 183 million. If you wish to leave your family at least AED 3.6 million, you must save all your salary for at least 12 years. However, if you buy life insurance, a monthly premium from tens to hundreds of dirhams will entitle your family to a disproportionately substantial death benefit.
It also doesn’t matter how long you’ve been paying premiums. Life insurance benefits accrue even if you have paid just one premium or have been insured for only days.
How about growing your money through trading or investment? You can use your premiums to invest in interest-bearing or value-appreciating assets.
This can work – if you know what you’re doing. However, it can tie up your money in non-liquid assets. More importantly, it’s a highly risky strategy. A market downturn can cause you to lose everything you’ve earned, leaving your family destitute.
Life Insurance: You Need It
Some claim it’s a waste to buy life insurance – all the premiums you pay that you don’t and can’t get back.
However, if you understand what you’re actually buying when you purchase life insurance, you will realise your premiums are not wasted. Specifically, your premiums buy you peace of mind – the assurance that, even if you pass, your loved ones can carry on financially unharmed.
HAYAH is an insurance company licensed by the Central Bank of the United Arab Emirates. We provide simple life, term life, and employee insurance in the UAE. We can help you protect your family with life insurance. Talk to us.