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Deciphering the Pros and Cons of a Term Insurance Policy

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Is term insurance just a passing trend or has it found a lasting place in the financial landscape of the UAE? What has driven the Emirati populace to gravitate towards it, giving it almost a ‘permanent insurance’ stature?

Many people in the UAE are now finding term insurance to be an indispensable shield against unforeseen contingencies. The reasons to buy are plenty, ranging from term insurance’s affordability to the peace of mind that it provides. However, like any financial instrument, it isn't a one-size-fits-all solution.

Before diving headfirst into a term insurance policy, it’s of paramount importance to weigh the pros and cons of a term insurance policy. This article will meticulously outline both so that you're equipped to make an informed choice.

Advantages of Term Insurance Policy

Amidst a plethora of insurance options, the term insurance policy stands out by offering straightforward solutions at attractive rates. Here's a deep dive into its numerous advantages -

  • Simple to Buy: Unlike more complex insurance policies, term insurance is straightforward. One doesn't have to navigate a labyrinth of clauses and provisions. For instance, a resident in Dubai can purchase a policy online within minutes, with minimal documentation.
  • Easy to Understand: The clarity of term insurance policies means you know precisely what you're getting. There are no hidden terms, making it easier for the average UAE resident to comprehend their coverage fully.
  • Cost-Effective: Compared to other life insurance policies, term insurance offers significant coverage for a fraction of the cost. For instance, a 30-year-old non-smoker in Abu Dhabi might find policies that offer AED 1 million coverage at surprisingly affordable annual premiums.
  • Peace of Mind: Knowing that your loved ones are protected financially, should anything happen to you, is invaluable. A term insurance plan provides the assurance that the future of one’s family is financially secure even if there is a loss of income due to the policyholder’s demise. 
  • Flexibility: Term insurance allows policyholders to choose the duration of coverage, whether it's a decade or more, fitting various life stages and requirements.
  • Renewability: Most term insurance plans in the UAE offer the convenience of renewability, ensuring that you can extend your coverage period as required without undergoing a new medical exam.
  • Different Riders Available: You can enhance your coverage with riders such as critical illness, accidental death, or permanent disability riders. For instance, a resident in Ajman might opt for a rider that provides a payout upon diagnosis of certain medical conditions prevalent in the region.
  • Different Mode of Premium Payments: Catering to diverse financial situations, policies often offer various payment modes - monthly, quarterly, or annually. So if you prefer, say, quarterly payments, you have the flexibility to do so.
  • Financial Protection to Family: The primary purpose of term insurance is to ensure that the policyholder’s family can maintain their lifestyle in the absence of the former. If the primary earner in a household were to pass away, the policy could cover expenses like children's education, daily expenses, or even mortgage payments.
  • Tax Benefits: While UAE doesn't levy personal income tax, there are ancillary financial benefits and potential savings connected to insurance policies.

Always consult with a local financial advisor to explore these avenues.

Disadvantages of Term Insurance Policy

As much as term insurance policies are hailed for their numerous advantages, they also come with certain limitations. While they serve as a shield during uncertain times, their structure may not cater to everyone's requirements. 

For a holistic understanding, it's essential to delve into these disadvantages and ways to navigate them:

  1. Absence of Maturity Benefits: One of the significant disadvantages of term insurance is that if the policyholder survives the policy term, no maturity benefits or returns are received. 

The Fix: You can consider a Return of Premium (ROP) term plan. Though the premiums might be slightly higher, you would get back the total amount paid as premiums at the end of the policy term.

  1. Lack of Incentive: There's a perceived lack of motivation for some individuals since the term policy doesn't offer any financial returns if the policyholder outlives the policy term. 

The Fix: It’s important to remember that the primary purpose of term insurance is protection, not investment. Focus on the peace of mind that it provides, knowing that one’s family will be financially secure in the absence of the policyholder.

  1. Absence of Investment Component: Another apparent disadvantage here is that term insurance doesn't double up as an investment tool. It doesn't contribute to wealth accumulation or offer dividends. 

The Fix: It is advisable to pair your term insurance plan with a separate investment instrument like mutual funds or a capital-guarantee plan to ensure wealth growth and security simultaneously.

  1. Fluctuating Premiums Based on Age: As you age, if you wish to purchase a new term policy, the premiums will be higher reflecting the increased risk associated with age. 

The Fix: For this reason, experts recommend opting for a longer-term policy while you're younger. This locks in a lower premium rate for an extended period, ensuring you reap the benefits of foresight.

  1. No Cash Value Component: Unlike whole life insurance or universal life insurance, term insurance doesn’t accumulate any cash value. Thus, if you decide to end the policy, you don't receive any monetary value in return. 

The Fix: If a cash value component is essential for you, consider diversifying your insurance portfolio by adding a whole life policy.

  1. Policyholder Cannot Enjoy the Benefits: The benefits of a term policy are exclusively for the beneficiaries. The insured individual doesn't receive any monetary advantage directly from the policy.

The Fix: As we saw earlier, the whole purpose of term insurance is financial protection for your family! However, you can try out the fix given above, i.e., getting a life insurance plan with an investment component.

Bottom Line

As we've journeyed through the intricacies of term insurance, it becomes evident that just like all financial instruments, term insurance possesses both strengths and limitations. Its advantages, from simplicity to cost-effectiveness, make it an enticing proposition for many in the UAE.

Yet, understanding the disadvantages of term insurance is equally vital to ensure a well-rounded perspective. While the absence of maturity benefits or an investment component might deter some, strategies to counteract these shortcomings exist.

Ultimately, the choice to invest in term insurance hinges on one's individual needs and circumstances. By acquainting yourself with the pros and cons of term insurance, you can make a well-informed decision and ensure not just financial prudence but also peace of mind for the future.

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