LIFE INSURANCE: A SURE-FIRE WAY TO AN ASSURED FINANCIAL FUTURE
“I detest life-insurance agents: they always argue that I shall die someday, which is not so”. Stephen Buckler Leacock.
Life Insurance agents are easily dismissed as doomsayers peddling horrific speculations of the future.
Maybe, because most people are uncomfortable with the subject of their mortality. Or the agents fail to communicate the benefits of taking up a life insurance policy clearly.
In my experience as an insurance advisor, I’ve been faced with situations where I didn’t get a chance to go beyond my introduction to the subject before being dismissed by prospects.
Therefore, I’d like you to note that life insurance is not;
- A prognosis of evil occurrences in a person’s life. Although, there are uncertainties, but we may not all fall victims to them. Nor,
- A form of defence from harm. Some people feel insurance companies are trying to do what only God can do – protect or guard us against evil.
This article would help you better understand life insurance, and also answer common objections against life insurance.
Here’s what we would discuss;
- What is life insurance?
- Why do people think it is an unnecessary investment?
- Why is it important?
- What are the types of life insurance?
- What should you look out for when choosing an insurance company?
What is Life Insurance?
Mr John is an accomplished Engineer of about 43 years, married with three kids. Months after moving into their new house, he lost his life in a motor crash. Leaving his housewife and three minors, with little funds to carry out postmortem activities, and survive. Fortunately, she finds documents containing his life insurance policy and goes to the company to confirm the details. Having observed due procedures, she received a claim of 20 million naira as the sole beneficiary of his Term Life insurance policy.
Generally, insurance is an agreement undertaken by a person or an entity with an insurance company to receive some level of protection against financial loss that may be caused by certain contingencies.
More specifically, life insurance (or life cover) is an agreement undertaken by a person with an insurance company to pay a sum of money to a named beneficiary in the event of the person’s death or after a given period.
This agreement is usually referred to as a policy, and the person who takes up the agreement is the policyholder (or the insured). The policy is serviced and kept active by the policy holder’s premiums (payments prorated with the period of agreement).
Just as in our story, Mr John’s wife was able to access the funds because he kept the policy active until the time of his death.
The policy holder could also be the beneficiary in the case where claim is not tied to the death of the policyholder but the end of the policy term (maturity period).
Having a life insurance policy in your investment portfolio could be critical in toning down the financial impact of an unfortunate incident that may affect you, your family and/or beneficiaries negatively.
Why do people think it is an unnecessary investment?
In my conversations with prospects, some of them think purchasing life insurance is unnecessary because;
- They have other securities in place to cater for such loss.
- They aren’t the only breadwinner.
- They are not breadwinners nor have people they are responsible for.
- Some think insurance companies are a scam.
But on the contrary;
- Your securities, including physical and liquid assets, are threatened by different kinds of risks that can lead to a loss of those assets. One of the effective means of managing such risks is by adopting the risk transfer system, which involves transferring the risk to an insurance company. This is done by purchasing an insurance policy that would serve as a cover for the asset.
- Secondly, you may not be the only breadwinner, but your absence would create a gap and burden that would be too much for your partner to bear.
- Also, do you have to wait until you are responsible for people before taking steps that may be beneficial for your future? Besides, the earlier you make life insurance choices, the cheaper your premiums.
- Lastly, not all Insurance companies are scam. Companies like Leadway Assurance, AIICO, and Custodian Life Assurance, have existed for decades in Nigeria and have proven to be credible and responsible, especially in paying claims. Insurance companies also have reinsurer companies that support them in carrying the burden of their clients.
Apart from these objections, some persons are discouraged from taking up insurance policies due to the cost of the premiums.
They complain that the premiums are expensive, and conclude that insurance is for the rich. But premium rates are calculated by measuring risk exposure.
The cost of premiums are determined by factors, such as; age, gender, occupation, lifestyle and health conditions.
- Age – The older you get, the more risks you encounter or engage. If you take up a policy at a younger age, you are likely to get a cheaper premium. So it would be wise to begin early.
- Gender – Life expectancy for the male gender reveals that they are more exposed to risk than females, hence their premiums are higher.
- Occupation – Jobs that involve performing risky tasks or endeavours attract higher premiums than those that have minimal risks. For instance, a company secretary is more likely to get a cheaper premium than the company engineer, because the job of an engineer exposes him to certain hazards.
- Lifestyle – A person who smokes or engages in unhealthy habits or risky adventures that can endanger his life, would pay high premiums.
- Health conditions – A person with a medical condition or history would also pay a higher premium than a person without, because he/she is more vulnerable and faces a higher death risk.
So the high-risk rate justifies the premiums. This is usually verified by underwriters while processing your documents and medical reports. With proper guidance from an insurance advisor, you can get policy options and choices that would be suitable for your pocket.
Why is Life Insurance Important? – Benefits
The basic essence of a life insurance policy is to serve as financial support for the family in the wake of an unfortunate event.
There are other benefits to life insurance such as;
- Securing the financial future of your family: life insurance is one of the most efficient ways of creating a financial system that would run in your absence. It is like an inverter system that keeps your family going even after the incident.
- To accomplish financial goals: it is also a useful tool in achieving financial goals, even against the odds. It could be sorting out your child’s future education, so whether you are around or not, they would still have the privilege.
- To pay off loan or debt: insurance creates security for debts, such that it gets settled in the event of death. So the family would not be burdened with offsetting the loan.
- To protect your business: key man insurance, for instance, helps to protect your business from the loss of a vital figure whose absence can financially impact wreck it.
- To serve as an inheritance: life insurance can be used as a means of transferring wealth to your children/beneficiaries. They receive the funds at the maturity of the policy (which could either be upon death or at the end of the policy term).
- Tax exclusion benefit: insurance gives you the privilege of tax exclusion. Life insurance costs are deducted from your tax, and you are granted a refund of income invested in life insurance at the end of the financial year. So In the end, you have no loss.
Ultimately, a man with one or more life insurance policies can live without worrying about the unknown future.
Types of Life Insurance
Beyond providing financial compensation in the event of a loss, life insurance can be used to achieve other goals.
There are three categories of life insurance;
- Life protection
- Savings and investment
- Life Protection
Life protection doesn’t directly mean guarding one’s life against unfortunate incidents but reducing the financial impact of such incidents.
It involves providing financial compensation to the beneficiaries when the incident covered occurs.
The occurrence of such incidents also marks the maturity of the policy, and claims would be granted to the beneficiaries as long as the policy was kept active.
Life protection policies are the main policies of insurance companies. They are mostly pure risk policies as you may not get a refund if the risk doesn’t occur.
There are two basic types of life protection, they include;
a. Term insurance, and
b. Whole life insurance
a. Term life insurance
Term life insurance, just as the name implies covers for a certain period (term) chosen by the policyholder. It could be for a year, or last up to 30 years, depending on the package.
The insured incident is death (except optional riders like critical illness, accidental or permanent disability are acquired). The incident insured against must occur during the policy term (while the policy is active) to attract claim.
If the insured does not die within the policy term, the sum invested cannot be retrieved. The sum assured determines the premium rate, but the premiums are relatively cheap. Leadway Assurance, for instance, requires a premium of 10,000 naira for 1 million naira sum assured.
Subsidiaries of term life insurance include;
- Mortgage Life Insurance: it covers the insured’s mortgage and pays claims; usually outstanding loans, to the lender when death occurs.
- Credit Life Insurance: it covers the insured (the borrower) and pays claims, usually outstanding debts if the insured dies.
- Group Life Insurance: it covers members of a group; this group could be members or employees of an organization.
- Key man Life Insurance: it covers an important figure, partner or owner of an organization, whose demise would greatly affect the financial stability of the company or lead to the shutdown of the business. The company acquires a policy to protect such individuals, pay the premiums and are the sole beneficiaries in the event of the person’s death.
b. Whole Life Insurance
This type of life insurance covers the insured for the entire period of his/her life. It is set to pay claims whenever the insured dies, as long as the policy is kept active.
Unlike term life insurance, policyholders of whole life insurance can surrender their policy and get their cash back. But it would attract financial penalties.
Beyond protecting against death, life protection could also be purchased to cover education expenses mainly for a particular level of education, or the lifestyle protection plan which provides you with income in the case of losing a job that sponsors your level of lifestyle or comfort.
2. Savings and Investment
This aspect of life insurance helps you save funds to meet future needs or fulfil financial goals.
Unlike life protection plans, it has a surrender value and its maturity period is not solely dependent on the death of the policyholder, but also the end of the policy term.
The policyholder chooses the policy duration and makes premium deposits prorated within the period. Upon maturity, he receives the sum assured.
There are target plans and simple savings and investment plans that can be used to build savings and investment goals for a project, children’s future education fees, etc.
An important feature in the savings and target plans is the life cover.
- For savings, there is a free basic life cover for the insured, so if death occurs, his/her family will be compensated with the base cover amount together and premiums gathered up to that point.
- While for target policies, the base cover is the sum assured. So if death occurs before the end of the policy, the beneficiary would receive the full worth of the policy, as long as the policy is active before the time of death.
The target plan helps to ensure the completion of projects whether the funder is alive or not.
For instance, if the sum assured is 20 million at the end of a 7years term, and the policyholder dies 2 years into the policy without completing the payments, his beneficiary would receive the 20 million sum assured. But if he stopped paying premiums after the first year, the sum assured would be calculated by the amount of premium paid.
What to look out for when choosing an insurance company
Before choosing an insurance company, it is important to check the company’s;
- Professional reputation – this involves checking their validity by looking through their history (offline and online), for reviews and details that reveal their expertise and credibility.
- Financial stamina – this is a crucial aspect of the company, as their ability to protect you and your family is on their financial strength. Therefore, as you investigate their history and reviews, you must look out for how much claims they have paid, and clients' opinions on their services.
- Reinsurer’s status – a reinsurer is a larger company that backs up an insurance company against risks that may be too much for them to handle. The reinsurer insures smaller insurance companies. An insurance company that is insured by a reinsurer company is secured from risks that may threaten its capacity.
- Ease of service – their services must be quick and easy to access. Ensure that their procedures are easy to grasp and accessing claims wouldn’t be difficult.
A huge part of our success in life is tied to the level of financial independence we have or can access.
In the wave of chaos and pandemics haunting our society, the only way to secure the financial stability of our families even in our absence, is by acquiring life insurance policies.
It is therefore important that we gain proper understanding of life insurance to guide our judgment. It would also direct us towards making choices that would lessen our worry, and attract tangible benefits.