How to take out the right critical illness and life insurance protection

While covering yourself for death, serious illness or injury is important, make sure the policy is suitable for your needs

Illustration by Mathew Kurian 

Everybody needs a little protection in life. Death, illness or serious injury may seem unthinkable at this stage in your life, but it can strike anyone, at any time.

If you have financial dependents then you need to protect them in case the worst happens.

Even if you don’t, you need to be sure you can pay the bills and service your debts if you fall sick and cannot work.

Most people don't like to think about this stuff and certainly don't want to spend money on insurance premiums, when they could splash out on something more exciting instead.

Another problem is that some UAE residents don't trust insurance companies or the advisers that sell their products.

Insurance can be hugely valuable but you need to be careful how you buy it.

Do I need cover?

The first question is whether you need cover at all. Stuart Ritchie, director of wealth advice at AES International in Dubai, says start by asking yourself: "How would my family manage without me?”

Steven Downey, chartered financial analyst candidate at Holborn Assets in Dubai, says if you rely on your income and have debts, then you need cover. “This also applies if you have family in your home country who are dependent on your income.”

You might also need life cover if you have assets back home that may be subject to inheritance tax, and you don't want to sell them to cover the bill.

Not everyone needs insurance, though. “You may not need cover if nobody depends on your income, and your assets are more than sufficient if you or your spouse died,” Mr Downey says.

If you do need insurance, the next step is deciding what you require exactly.

How do I protect my life?

The most common type of life cover is known as term insurance, which pays a cash lump sum if you die within a pre-agreed period, typically anything between five and 25 years.

This keeps the cost down, but there is no cash-in value at any time, and no payout if you die after the term.

The alternative is whole-of-life insurance, where your premiums are invested and the policy pays out whenever you die.

Both products are provided by insurance companies and sold to UAE residents via financial advisers but whole-of-life products have faced some criticism for being an expensive and poor-performing investment vehicle.

As a result Demos Kyprianou, a board member of SimplyFI, a non-profit community of personal finance and investing enthusiasts, advises against whole-of-life. "You should avoid any insurance policy with an investment element. Keep the two separate.”

Advisers often give whole-of-life cover the hard sell and are rewarded for doing so, as the first two years of premiums typically go straight to them as upfront commission - something that may change when the UAE Insurance Authority introduces new regulations capping the commission.

Another drawback is that cover is expensive and you have to keep up the premiums after you stop working if the agreed term goes beyond your retirement. A policy can go up to age 80 or even 95 with severe penalties if you don’t last the course.

Mr Kyprianou says term life cover is better for the vast majority. “If you want to invest as well, then build your own portfolio of low-cost exchange traded funds (ETFs), which have minimum charges and maximum flexibility.”

Interactive Brokers, Internaxx, Saxo Bank and Swissquote run good low-cost DIY investment platforms, while AES International sells ETFs with fee-based advice.

What other insurance do I need?

People tend to focus on life insurance but a non-smoking male aged 40 is actually 4.1 times more likely to suffer a serious illness than die before age 65, according to insurer Pacific Life.

Cancer accounted for 47 per cent of the $102 million (Dh373m) paid out to its life and critical illness customers in the Middle East from January 2016 to December 2018 and heart attacks for 38 per cent, Swiss insurer Zurich says.

You can guard against this with a policy called critical illness cover, which pays a lump sum if you suffer, say, cancer, heart attack, stroke or kidney failure.

Mr Downey says this is worth having if your health insurance will not cover all your medical bills, and you don't have enough cash saved to cover a year or two off work. “A combined life insurance and critical illness policy offers the best value.”

How much you pay for cover depends on factors such as your age, state of health, whether you smoke (in which case you will pay a lot more), and which insurer you choose.

Another type of cover called income protection will replace your earnings if you fall ill and cannot work but Mr Kyprianou is unimpressed by the expat policies he has seen. “They had a huge number of caveats," he says. "If you are lucky your company will offer a corporate policy instead.”

How much cover do I need?

Mr Downey says that some insurance sales staff give blanket statements, saying for example that everybody needs four years of salary coverage. “In practice, it depends on your personal circumstances,” he adds.

Two years is the average recovery time for a critical illness, so two years of income is a must, says Mr Downey. “So if you earn $150,000 a year you will need $300,000 of cover.”

Then subtract any existing ‘rainy day’ emergency fund you have built up. “If you have $100,000 in the bank, you may only need $200,000 cover," he says.

You may need more life cover though. In this instance, Mr Downey says you should review all your financial commitments. “These include funeral expenses, your mortgage, ongoing costs such as children's education and any partner’s living expenses. Again, you can offset savings.”

If the cost seems daunting, take out a decreasing term life insurance where the policy value slowly declines with age and your commitments reduce, he adds.

Figures from AES International show that a 40-year-old man wanting $500,000 of combined life and critical illness cover over a 15-year term would typically pay $200 a month, although that would rise to nearly $350 if they smoked.

Premiums get more expensive as you get older and the risk of falling ill or dying increases. So if the same man if he took at the same 15-year policy at age 50 he would pay $521 a month, while if he smoked he would pay a hefty $885.

Those who have had previous illnesses could pay more for cover, or certain conditions may be excluded from the policy.

Also check whether you have any death-in-service benefits from your employer, which could reduce the amount you need to buy from your own pocket.

Mr Kyprianou suggests buying insurance when you are still relatively young and in good health. “It gets more expensive once you’ve had health problems, which may be excluded from cover altogether.”

How do I buy it safely?

As with every other financial product, UAE residents and expats must take care who they buy from.

Mr Kyprianou suggests only buying direct from insurance companies, after doing your research. “Always read the terms and conditions, send any questions in writing via email and keep pressing for answers until you get a clear explanation," he says. "Don't sign unless you understand exactly what you are getting.”

A search on MyMoneySouq.com shows large insurers such as AIG, AXA Gulf, Friends Provident International, MetLife and Zurich Insurance are popular for term life and critical illness cover. Many banks in the UAE also sell protection.

Mr Ritchie says insurance is complicated and it is best to buy through an adviser, who must be regulated by the IA. “They will get you several quotes and find the most promising insurers, while certain products are only available through an adviser.”

As a general rule he favours the large international names for expats. “They often offer competitive premiums and benefits, while claims and customer service are usually faster and accessible 24/7.”

When comparing insurers, ask what percentage of claims they pay. "This should be higher than 85 per cent, a low claims ratio does not bode well,” Mr Ritchie.

Insurance is designed to give you peace of mind. Your insurer needs to be there for you if you have to claim.