Shopping around for the right mortgage from a UAE bank could save thousands of dirhams in life insurance cover.
Anyone buying a home in the UAE has to take out life insurance to cover the mortgage debt to the bank.
Many banks treat expats as a captive market by insisting they take out mortgage protection when they take out the loan.
But rather than let expats find the best deal by comparing costs with other providers, the bank ties the home loan protection with the mortgage.
Expats pay for the insurance but the cost may be added to the mortgage as a separate monthly charge or the interest rate may be increased to cover the expense.
But what many won't tell you is what the true cost is for level term life insurance – a policy that pays out the same amount if the insured person dies while it is in force.
This is the most expensive type of mortgage protection.
Decreasing vs level term insurance
Some banks will let mortgage borrowers arrange their own life cover or assign an existing policy to the loan or even mix-and-match old and new policies so long as the total sum assured covers the mortgage.
And that's where decreasing term life insurance comes into play. This policy pays out on the death of the insured, just like level term, but the amount decreases each year in line with the mortgage debt.
For the insurer, the risk decreases in line with the mortgage debt, which means the premium is cheaper and can come in thousands of dirhams less than a level term policy.
Another reason expats should source their own decreasing term life insurance is the policy is portable should they move to a new home with a different lender.
This flexibility can cut mortgage costs significantly over the life of a loan.
The policy is also cheaper as the premium applies to the expat's age and health on the date they took put the policy. If you move 15 years later, you are 15 years older and maybe less healthy, which will put up the costs of a new policy.
Pre-paid cover trap
Pre-paid insurance is another catch to watch out for. At first look, buying insurance for a 25-year term in advance might seem a reasonable option.
But although expats save the monthly premium, the bank earns extra interest from the mortgage repayments as the amount to pay the policy is added to the loan from the start.
Run the figures, comparing the extra monthly interest payment over 25 years with the life insurance premium paid monthly over the same time to see which is the cheapest.
Do expats need critical illness cover?
Some financial advisers will suggest adding critical illness cover to a term life mortgage protection policy. This is not mandatory cover for a home loan.
This is OK if you are young and healthy, but can make the premiums rocket.
The policy will pay out if the person insured suffers from one of several pre-defined illnesses, such as heart attacks and cancer.
The policies do come with lots of exceptions and anyone taking out critical illness cover should flag any pre-existing medical conditions, or they could risk the insurer rejecting a claim.