Money clinic

Death is a subject nobody likes to dwell on. But without giving thought to what will happen to your financial assets or commitments should you pass away, you could leave your family with more than just grief to contend with.

In most cases your existing financial commitments - such as mortgages, loans or credit card debts - don't go away when you die.

Instead, the burden of these debts is passed to your next of kin who then assumes responsibility for paying these debts off.

Life insurance can ensure that this doesn't happen - and that in the event of your death, the insurance company pays off any unpaid debts and honours any financial commitments you made in your lifetime.

These policies can also ensure that should you die, your family receives a payout as a one-off lump sum, which provides them with financial security in the event of your death - in addition to any money or assets they may be entitled to in your will.

Understanding insurance

To those who don't work in the insurance industry the terminology that defines the different types of insurance policies can be baffling. But broadly explaining, life insurance can be divided into two different categories - term insurance and whole of life insurance.

Term insurance provides coverage for a fixed period and is more suitable for those with temporary needs - such as debts to pay off within a specified fixed period. This type of insurance policy provides coverage usually for up to 30 years and usually for a fixed premium. The policyholder insures his or her life for a specified period of time and if they die within that period then the stated beneficiaries on the policy receive a lump sum payout.

However, if the policyholder does not die during that period then no lump sum is released.

Bashar Khatib, sales director at Nexus Insurance brokers explains that such a policy is designed for those with temporary financial needs as it covers any debts the holder has until the time they are repaid. "Term insurance is more suitable for those with temporary needs such as policyholders who have taken out a mortgage loan for 10 years or a loan for five years.

"Those customers need to ensure that their debts are paid off in the event of their death; otherwise the burden of that debt can be passed on to their families," he adds.

Many banks will offer a form of insurance alongside loan products such as mortgages or personal loans to ensure customers' debts are paid off in the event of their death and it is mandatory in the UAE, as in many countries, for customers to take out life insurance that covers mortgage repayments.

Customers can choose to take the policy offered by the bank or the one it offers in partnership with an insurance company - or can seek an alternative policy through an insurance broker - or independently.

As well as protecting temporary financial commitments another advantage of term insurance over life insurance is that it is cheaper.

This is because from the insurer's point of view there is every chance that the policyholder will not die during the term of the policy and no payout will have to be made.

Whereas they are guaranteed to have to make a payout for holders of whole of life insurance policies so the premiums are higher.

Whole of life insurance policies insure the policyholder for the whole of their lifetime and guarantee that in the event of their death their beneficiaries receive a lump sum.

These types of polices often contain an investment component whereby the money you pay into them is invested in funds that will help to increase the value of the cover - thus allowing for any rise in the cost of insurance without the customer having to pay higher premiums.

"With a permanent policy you pay more premium but the accumulation of that premium and the investment of that premium helps to increase the value of the insurance which covers the rising cost of the premiums as the policyholder gets older," explains Khatib.

"The extra price that the policyholder pays for a whole of life policy is invested and yields higher returns and continues to grow.

"So when the cost of that insurance escalates with time, there is enough money available to cover those increasing costs."

It is possible for you to cash in your whole of life insurance policy and to use the money as you wish before you die; however, once you have done this you must cancel the policy and will no longer be entitled to any life cover from that policy.

There are certain risks associated with whole of life policies which customers should know about and should ask insurance companies about before taking out a policy.

It is possible for insurers now to offer reviewable policies. This allows them to increase the premium a policyholder has to pay if it is believed that the premiums the customer has been paying are not high enough to guarantee the lump sum payout.

In these cases the insurance provider may only guarantee the amount the customer must pay in premiums for a set period of time and will review it regularly.

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