Term Insurance or Whole Life Insurance - Which one should I Opt for?

Before you make such a decision, it is important that you know what’s what. The fact is that both whole life insurance and term insurance in UAE have their individual virtues; however, it is only a matter of what will be more suitable for you.

Here is all you should know before trying to make a decision about which one to choose.

What does Whole Life Insurance mean?

It is a kind of permanent life insurance that not only offers a death benefit but also involves the element of cash value.

• This type of life coverage includes an element of the cash value that contributes to higher costs. This means that you make payment of the insurance premiums, some of which are available for borrowing against or cashing out in your lifetime.
• On buying whole life insurance, your insurance provider will deposit your insurance premium (without insurance cost & other expenses) in a cash value account.
• For this purpose, this type of life insurance will provide you with an accumulation of cash value. You can make use of it whenever required.
• You will get level premiums and life insurance coverage for a lifetime as long as you pay the premiums on time and according to the insurance requirements.

Generally, whole life insurance is more expensive as opposed to term plans. 

What does Term Life Insurance mean?

Term insurance is comparatively simpler and works just like your home or car insurance.

The main difference between whole life insurance and term insurance is that the latter is a pure insurance plan in which when the insured person passes away, the insurance company just makes payment of the policy’s face amount to the names nominee or beneficiary.

• Under a term plan, you make payment of the premiums either monthly or yearly, and your family will remain protected for that term (for instance- 20 years).
• The term policies are comparatively cheaper for those people who are under 50 years of age and do not have any existing illness. It may be more expensive for those who are above 50 years old and have an existing ailment such as diabetes.
• The tenure of the policy depends on many factors and can range between 1-30 years.

The general uses of term insurance can be the following- providing for loss of income of the family, covering the family’s short-term needs and debts, providing extra insurance protection during the years of child-raising, providing longer-term coverage for paying off the mortgage or for paying for college or school education. 

What is the Amount of Life Coverage that You Need?

This is a million-dollar question for most of us. Let’s try to find out an answer for the same.

A major part of selecting an insurance plan is deciding the amount of money your dependents would need. Determining the face value of the insurance (the amount paid by your policy on your death) is based on the following factors.

1)     Replacement of Income

Amongst the main factors of any life insurance is the replacement of income. In case you are the sole breadwinner for your family and bring a certain amount of income annually, then you should look for a policy payout that is enough for replacing your income along with some extra for guarding against inflation.

Once you have decided on the required face value for the policy, you can begin shopping around. There are various insurance estimators online, which can assist you in deciding the insurance amount you need.

2)     Debts

All the debts under your name should be paid off completely, including your mortgages, loans, and credit cards. In case you have a mortgage of AED 200,000 and a car loan of AED 20,000, then you will at least need AED 220,000 in the policy for covering all your debts. However, you also need to keep the interest in mind. You must take out some extra amount too for settling any additional interest and charges too.

3)     Covering Others

There are obviously other important people in your life and you might be thinking of insuring them. If you are a parent to a very young kid, your requirement for life insurance would probably be greater in such a case than at some other point in your life.

In case something were to happen to you, there should be sufficient funds available, not just for covering the final expenses but also for providing sufficient support to your child till the time they reach adulthood. Moreover, you will have to make some kind of security provision for the payment of their higher education.

If you have a family you will typically need a larger amount of insurance, which will be much more expensive than what the insurance required by a single person. In such situations, a term life insurance would be more suitable. 

What should be the Duration of your Insurance Coverage?

Coverage for final expenses or death is a permanent insurance requirement. In case all you need is final expenses then a small whole life plan will do the job.

Alternatively, raising a family means a large temporary need. There may be a requirement for a large insurance amount for about 20 to 25 years. After the completion of this term, all that has to be covered would be final expenses.

When the need for life coverage is temporary, term insurance in UAE is generally a better alternative. You can go for a policy that has a duration starting from 5 to 30 years that can be used for covering the higher needs. Post the expiry of the initial term, you will have the following options-

• Reduce the death benefit and hence, the premium
• Continue with the coverage at higher insurance premium, or
• Cancel the insurance policy entirely 

What is the Amount of Life Insurance that you can Afford?

Whenever it comes to your life insurance, there is always this underlying question.

This is very obvious that you can’t have life insurance above what you can afford. This is generally a problem for the people who require a wide insurance cover, that is, the people who have children dependent on them.

Raising kids involves their basic needs, education, wedding, and various other important things in their lives, which requires a huge amount of income. Hence, you may end with a little leftover amount for any contingent benefits such as life insurance.

In the majority of situations where insurance affordability is a major concern, a term plan can be the preferred choice. This is because it allows you to buy wide coverage at a lower amount of premium. 

Is my Need Permanent or Temporary?

There are various reasons apart from having a family, which would need additional life coverage, either on a permanent or a temporary basis.

• For instance, you may wish to have additional life coverage if you owe a mortgage against your house. The insurance policy will clear your mortgage in case of your demise, letting your family continue living in that mortgage-free house, hence, securing their shelter.
• Another situation where you may wish to have additional insurance is when you hold other kinds of debts. For instance, the debts you hold with your spouse jointly, like car loans or credit card debts.
• You may also have business-related debts. In case you have taken debt for starting a business or for expanding a business or sustaining it during a bad phase, you may wish to have additional life coverage, which will clear those debts.

 Term insurance in UAE tends to be a more cost-effective option because you can decide the policy term according to the duration you need for paying off your debts.

When it comes to permanent needs, you may have set up a trust for the security of your children or spouse. Now, funding such trust with whole life coverage is a common practice. A term plan may not be ideal for such a purpose because the plan will either end or old age will make the renewals expensive. 

Is an Investment Provision Required?

Both whole life and term insurance offer death benefits. However, only whole life plans offer cash value also.

The cash value is amongst the major reasons for making whole life plans more expensive as opposed to term insurance plans. A part of the difference in the prices of the two goes to the cash value of the plan. 

Cash Value

Cash value is a representation of the account value, which can be borrowed against or can be liquidated on canceling the policy.

Therefore, a whole life plan not only provides a death benefit but also, a potential for building up cash value. Such a benefit can be of importance after 20-30 years, even as an additional source for the time of retirement. 

What Should You Buy- Term Life or Whole Life Insurance?

Generally, you may hear that the best strategy is buying term insurance in UAE and investing the difference.

Here’s what it means:

You can buy an economical term life plan and invest the money that you would have otherwise spent on the premiums of whole life plan in an index fund or mutual fund. You may end up with more funds after many years with such a strategy.

If you have a large family, then buying term insurance may be better; however, for a single person with no dependents, a whole life policy might be more suitable. But, this may vary based on several different factors.

For the young generation, term insurance is more advisable as it is inexpensive and straight-forward. You will be left with more money to invest for your retirement as well as other financial goals.

Some people may be looking for insurance, which offers a guaranteed return on the funds they have invested. In such a case, investing in whole life insurance is a better option.

While buying life insurance coverage, it is recommended that you focus more on “what are my needs, financial habits, and life situation” rather than “which is better amongst the two”. This will help you in deciding, which type of policy is more suitable for you.