When you acquire a mortgage in the UAE, it’s essential to be aware that life insurance is mandatory; hence optional when buying with cash. Whether you’re fully informed about it or not, life insurance is an integral part of your home loan.
Mortgage life insurance is specifically designed to safeguard your mortgage debt in the event of your passing. This ensures that your family can continue to enjoy the property without the burden of mortgage payments. Most banks typically charge this insurance on a monthly basis, independent of your loan or through an increase in the interest rate to cover the monthly insurance cost. However, certain banks may request upfront payment, while others might incorporate the insurance premium into your interest rate.
Alternatively, you have the option to explore more cost-effective options, such as procuring life insurance from an independent insurance company. Some banks may accept life insurance policies from external providers, but each bank retains the pre-rogative to mandate insurance under their specific program.
In the case of married couples where the property and mortgage are solely in the name of the working partner, it’s not obligatory for the non-working spouse to have life insurance. However, most advisors recommend at least partial coverage. If both spouses are on the property title, some banks insist that all loan applicants are covered, regardless of their income source.
It’s imperative to factor life insurance premium payments into your ongoing expenses when managing a mortgaged property. For non-smokers under the age of forty, life insurance costs are relatively affordable for an average loan. Nevertheless, expenses can escalate significantly as you age, experience health issues, or require higher insurance coverage. Full disclosure of any pre-existing medical conditions is a legal obligation. Failing to disclose such conditions could lead to the denial of your claim, potentially depriving your family of the insurance benefit when they need it the most.
Critical Illness Cover (CIC)
Additionally, life insurance advisors often suggest considering Critical Illness Cover (CIC). CIC can provide coverage for your mortgage payments in the event of a serious illness that renders you unable to work. While CIC is not mandatory in the UAE, it is advisable, especially if you are beyond your twenties. Having adequate CIC insurance can cover your loan payments for a few years, giving you the time needed to recover or sell the property if necessary.
Cost of Life Insurance
Life insurance premiums are an ongoing cost of owning a mortgaged home, and they should be factored into your budget. For non-smokers under the age of 40, life insurance costs are relatively low. However, costs increase significantly with age, health condition, and the insured amount. It is crucial to disclose any pre-existing medical conditions to your life insurance advisor to avoid potential claim rejection.
For instance, on a AED 1,000,000.00 mortgage, life insurance can cost as little as AED108 per month.
Factors Affecting Costs
Various factors can affect the cost of your life insurance, including your age, occupation, medical history, and even your country of origin. People from Western countries typically enjoy lower premiums. Smoker status can also substantially impact premiums; if you’ve consumed nicotine in any form in the last year, you may be considered a smoker.
Bank In-House vs. External Policies
Banks often offer in-house life insurance policies underwritten by major international insurers. However, in some cases, obtaining an external policy can be more cost-effective, especially for young and healthy individuals. Some banks allow you to use an external insurance policy, while others do not. External policies also have the advantage of portability, meaning you can transfer them to another property or bank in the future.
Pre-Paid Life Insurance Policies
Certain UAE banks may require pre-payment of a 25-year life insurance policy, adding the cost to your loan. While this eliminates monthly premiums, it significantly increases the total mortgage amount, resulting in higher interest costs over the life of the loan. It’s important to note that if the loan is terminated prematurely (e.g., selling or refinancing), you may receive only a partial refund of the pre-paid policy.
Decreasing Term vs. Level Term Policies
Some life insurance policies have decreasing sums insured over time as your mortgage balance decreases, known as “Decreasing Term” policies. These are typically designed for mortgage protection and are more cost-effective. In contrast, “Level Term” policies maintain a constant sum insured throughout the policy term and are suitable for broader family protection.
Property Insurance Vs. Content Insurance
Furthermore, when acquiring a property through bank financing, the bank typically requires the protection of the investment through property insurance. This insurance is essential to cover potential losses related to building costs and significant maintenance. It is a mandatory requirement when obtaining mortgage finance, ensuring the property’s safeguard.
However, when purchasing a property with cash, property insurance becomes advisable rather than obligatory. The decision to secure this insurance rests with the buyer.
In contrast, contents insurance remains entirely at the discretion of the occupier. If an occupier chooses not to procure any insurance and an unfortunate event occurs, such as damage or loss to personal belongings, the responsibility for repair or replacement falls squarely on their shoulders.
