Five Great Reasons why Life Insurance still benefits Expats in the UAE
Life insurance products are generally incentivised by governments worldwide because they reduce the burden on the state by the death of a breadwinner. Life Insurance products are often more tax advantaged than mutual funds in many countries and this can apply as much to savings and investment products offered by Life Insurance companies just as much as pure protection products. Maybe you don’t live in a high tax location today, but Expatriates are mobile by nature and it is quite possible you will be resident in a higher tax jurisdiction at the time of your death or at the time you take benefits. Encashing a Life Policy containing a portfolio of mutual funds will generate higher returns (after tax) than a straight portfolio of mutual fund in many countries because of this favourable tax treatment. You could argue that UAE residents should simply encash directly held mutual funds before they go and reside in a higher rate tax country but this is a high risk strategy. Markets could be depressed at that time and being forced to sell assets before you leave could crystallise an unnecessary loss. With Life Assurance you are freer to choose when to encash. Switching between mutual funds within an Insurance wrapper doesn’t usually incur a chargeable tax event either as any gains are normally rolled up within the policy until ultimate encashment. This is not generally the case with mutual funds where a switch to a different fund will usually trigger a tax charge in your country of residence, which could be significant and will impact long-term returns. On death, Life Insurance is often exempt from Inheritance Taxes (and sometimes it needs to be written under a Trust) as it can be structured to fall outside of your estate, meaning that your heirs and beneficiaries will inherit the full value of your assets. This is not generally the case with mutual funds, which normally form part of your Estate on death. Trusts, in combination with Life Insurance are particularly effective as a planning tool but on their own or in combination with straight mutual funds are not as effective. This is particularly due to the gross-roll up of benefits under an Insurance Policy.
- Death Benefits
Life insurance, by definition, carries an element of Life Cover. This is really important when saving for a particular goal like Retirement or your Children’s education. It may not be sufficient for you to save in mutual funds for your Retirement or your Child’s university education. What if you were to die soon after starting to save? You would not have built up a sizeable pot and on death, your loved ones would simply be paid the small sum accumulated to that point. Furthermore, it could be taxed. By saving in a Life Insurance policy, your life will protected with a sum payable on death which could secure the retirement you were expecting to enjoy with your spouse, or to secure the education of your child(ren), even if the worst were to happen.
Probate applies on the death of an individual and is the way that a state hands out money according to local inheritance law. This can be a lengthy process and it is not uncommon for it to sometimes take years to settle. Typically in the UAE, this is around 18 months. During this time, how would your beneficiaries provide for themselves if they depended on you for money? Life Insurance can be written in such a way that it completely avoids probate and monies can be directly released to intended beneficiaries. This is not generally possible in the same way with mutual funds where it is necessary to wait for probate to take its course.
- Freedom from Creditors
In some countries Life Insurance is seen as an asset which is free from creditors in the event of bankruptcy of an individual. Because the policy is for the benefit of your heirs rather than you, even though you are buying the Insurance, it is effectively ring-fenced from any court proceedings. As such it can be paid directly to your heirs without deduction of any debt to outstanding creditors. This is not usually the case with mutual funds.
The way that Life Insurance companies set up policies is fundamentally different from mutual fund companies. The beneficial owner of the mutual fund driving the investment performance of the policy is the Insurance Company rather than the individual. This can be very handy in countries where political risk or the risk of kidnap exists, especially if written under trust which would be a second layer of confidentiality.
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