“ A policy of life insurance is the cheapest and safest mode of making a certain provision for one’s family.”
Benjamin Franklin
Akinsure describes life insurance as a contract between an insurance policyholder and an insurer. The policyholder pays the policy premium, and the insurer promises to pay a sum of money to a beneficiary designated by the policyholder if the insured event (death) occurs.
Why is Life insurance important?
1. Helps dependents financially.
This is perhaps one of the most important reasons to get life insurance. For a person with dependents while nothing can replace them once they pass on. It takes deliberate planning so that their loved ones are not left financially destitute.
2. Additional cover/ rider, other than pay-out due to death
Some Life insurance covers include riders that cover education for children (this will usually have a saving component) Disability pay-out, in case of accidents or other occurrences that make it hard for the policyholder to continue with gainful income-generating activities
3. To enjoy tax breaks.
Generally, a person is entitled to tax relief of 15% of premiums paid on life insurance policies, education (with a maturity of at least 10 years), or health policies taken out for oneself or one’s spouse or child.
This relief that is available under the Income Tax Act is subject to a maximum of Kshs 60,000 per year.
There are various types of Life insurance in the Market, today we discuss some of them.An important note as we get into it , is that the insurance industry in Kenya is regulated by the Insurance Regulatory Authority
Types of Life insurance available.
1. Endowment policy
Wikipedia describes an endowment policy as a life insurance contract designed to pay a lump sum after a specific term or upon death. The typical maturities are ten, fifteen, or even twenty years up to a certain age
It further describes that some policies also have pay-out in the case of critical illness.
The distinguishing characteristic of an endowment life policy is that it has a saving component, which means the policyholder is entitled to get back his savings after the policy lapses. If the policyholder passes on within the policy period, then their beneficiaries will collect the policy amount.
Some insurance firms in Kenya use this policy to structure products such as education policies
Advantages
- Creates the habit of saving.
- Where policyholder survives the policy term, they are paid back the investment portion of their premium
- It helps, the beneficiaries financially in the event of death of the policyholder
Disadvantages
- The investment yields are very small sometimes even negligible especially if you compare it with other investment options in the market.
- Most have the rider of a mandatory contribution period of 3 years. If you default within these 3 years, then the policy could lapse.
2. Term Life Insurance
Term life insurance works very similarly to Endowment insurance except that it does not have an element of savings.
A policyholder decides the period for which they want the policy. It is popular with households where the policyholder has a large number of dependents, but for some time e.g. School going children or aging parents
At the end of the term, there is no money paid out to the policyholder in case he survives.
Advantages
- The premium cost is low because there is no element of saving
- Like the previous the beneficiaries stand to be compensated in the event of death of the policyholder, within the term of the policy
Disadvantages
- There is no cash-back arrangement once the term of the policy expires, each party goes its way
3. Whole life insurance
Investopedia describes whole life insurance as one that the policy is guaranteed to remain in for the insured’s lifetime provided the premiums are paid.
In this life insurance, the payout is only at the death of the policyholder.
Advantages
- The monthly premium rate may be quite cheaper compared to that of term insurance especially if you get the insurance at a young age.
- You do not have to keep renewing the term of the policy.
Disadvantages
- If during the policy period, the policyholder skips several consecutive premium payments then the policy will likely lapse, despite being consistent previously.
I cannot over-emphasis the importance of getting a life insurance cover, especially where you have dependents and I hope you are convinced too
Most insurance agents are usually keen to sell life insurance with an investment component to it, for obvious reasons. In fact, most parents/ guardians with school-going children will seldom be offered any other life insurance option other than one with an education policy rider.
My own opinion on this is that any kind of life insurance is good especially when you have dependents. However, I am also from the school of thought that insurance is not an investment and so I prefer to keep the two separate. So, I prefer insurance that has no investment component to it. In any event the yields are so low that it would be better to invest yourself
The takeaway from this is to ask as many questions as possible, research what you what so that when you meet with the insurance agent you get the product that best suits your circumstances and lifestyle.