Part 1: Life & Education Insurance Starter pack

If you’re like me, you’ve had couple of conversations with Insurance reps / sales people who try to sell you insurance products. If you mention that you’ve got children… their eyes pop and whatever conversation you had going is dropped with immediate effect for the topic — “have you covered / protected your family? Have you thought about your family’s future?”

I’ve taken those opportunities learn about the insurance cover from these great people with a specific interest to the numbers. I’d like to share some of the lessons that I’ve learned along the way:

Basic Insurance terminology

Sample Insurance Policy summary:
Age = 30 years old
Sum assured = Ksh 991,000
Premium (Monthly contribution) = Ksh 5,000
Term = 20 years
Bonuses = Ksh 1,133,000

Using the above example, I’ll define some basic insurance terms that you’ll need to understand:

Term: This is the duration of the insurance cover. After these 20 years elapse (using this example), then you are no longer covered by this particular insurance policy. You would need to sign up for a new insurance cover after that if you’d like to be covered. Typical terms include: 10 years, 15 years and 20 years.

Age: This is simply how old you are or will be on your next birthday. General rule of thumb: The older you are, the higher your monthly contribution will be for a particular sum assured. This is because the insurance company considers you “more risky” / “more likely to die or become incapacitated” if you are older.

Premium: Most are structured such that you pay a fixed monthly contribution throughout the term of the insurance cover. In other cases, your monthly contribution is set to increase each year e.g. in year 1 your monthly contribution is Ksh 5,000 then in year 2 your monthly contribution is Ksh 6,000.
You also have the option to give a yearly contribution instead of a monthly contribution.
Lastly, you may opt to give a one-time lump sum contribution payment at the very beginning to cover you for the entire term of the insurance cover.

Sum assured: If you die or become permanently incapacitated (e.g. you get paralyzed) within 20 years (the Term), then you &/or your descendants are given an amount Ksh 991,000 that is called the sum assured.
In Endowment insurance packages, a percentage of the bonus (interest) may also be given to your beneficiaries in addition to the sum assured. This is described further down.

Bonuses: If you don’t die or become incapacitated within the 20 years (the Term), then the insurance company will give you some of the profits that they would have made from investing your monthly contributions. In this example, they’ll give you Ksh 1,133,000.

Principal: The total amount of money that you have contributed throughout the term of your insurance policy. In the example above, if you survived the term of the insurance, then the total principal you would have paid by the end is Ksh 5,000 x 12 months x 20 years = Ksh 1,440,000.

Now lets shift focus to the table above and unwrap Education plans, Endowment plans & Term life plans.

Education Cover is simply an Endowment plan, packaged & sold with a sentimental touch — we all have a soft spot for our children.

Endowment vs Term Life vs Education plans

Term Life insurance plan in most insurance companies won’t pay you anything in the case where you don’t die. A few insurance companies will provide you with the exact amount that you had contributed (the principal) — though they may shave off some amount to cater for some costs incurred e.g. in the table above, the principal repaid is Ksh 1,200,000 as opposed to Ksh 1,440,000.

But in the case where by you die during the term, your dependents get about 5 times more from the Term Life insurance payout than they would have if they had taken any type of Endowment cover.

Endowment & Anticipated Endowment plans promises you some payout at the end of the term or at specific points of the term as seen in the table above. This is a summation of the bonus plus the sum assured.

Education cover is a type of Endowment plan — usually the Anticipated Endowment plan. For instance, an education policy in where you have payouts in year 12, year 13, year 14, and year 15 is actually a type of an Anticipated Endowment plan.
The table above shows an Education policy with one single payout at the end of the term which is a type of a simple Endowment plan.

Mindset change: Separate insurance from investments

If you’re purely looking for insurance, then you’d go for “Term Life” insurance which is similar to vehicle insurance in that, once you’ve paid your premium, you’re not going to get that money back at the end of the term. Note: A few, but not all insurance companies give you back your principal.
If you do die or you become incapacitated during the term, then you / your beneficiaries receive a handsome payout that is about 5 times greater than the payout from an Endowment or Education cover in the event of death.

However, many people consider this a painful truth and therefore get tempted to get something at the end of the term “in case I don’t die”. This therefore gets people to select either the Endowment & Education plans.
Which therefore means that the Endowment / Education plans have been used as both an insurance plan as well as an investment plan. This however gives you a raw deal on both ends: Low returns on investment. Low insurance cover. Let insurance be insurance and let investments be investments.

The Endowment / Education plans have been used as both an insurance plan as well as an investment plan. This gives you a raw deal on both ends: Low returns on investment. Low insurance cover.

On the flip side, if you do avoid death, then the amount that you’re given at the end of the Endowment plan’s term is more than that of a Term Life plan. But it is less than what you would have gained by putting that money in a Money Market Fund (MMF) with a 7% interest rate, yet MMFs give you the benefit of accessing the funds whenever you need it.

MMF returns: Ksh 5,000 monthly contribution for 20 years @ 7% p.a. interest = Ksh 2,619,826 which is greater than Ksh 2,328,000.

Let insurance be insurance and let investments be investments.

Conclusion

If you truly want to protect your family in the event of you death / incapacitation through insurance, then I would propose that you take up Term Life cover. Your beneficiaries would get a whopping Ksh 5,813,000.

Compare this to a measly Ksh 888,000–1,058,000 in various Endowment packages plus a percentage of the bonus depending on when you died e.g. 25% (if you died within roughly 5 years of the 20 year term) of Ksh 1,270,000 = Ksh 317,500 .

Here’s another way of looking at it: cost of the premium. If you want to cover your your family with a sum assured of Ksh 1,058,000 using a simple Endowment plan, your premiums (monthly contribution) would be Ksh 5,000 each month.
Whereas if you want to cover yourself for that same sum assured of Ksh 1,058,000 using Term life, your premiums would be much cheaper: Ksh 915 each month.

Using this example, you get the same protection for a much cheaper price using a Term Life plan. And you have the benefit of channelling the rest of the money Ksh 5,000 - Ksh 915 = ksh 4,085 into investments such as Money Market Funds (separating insurance from investments).

This is what my advice would be:

Take the Term life cover, which is much cheaper (e.g. Ksh 915) than the Education / Endowment plan for the same sum assured. Then invest the rest of the money (e.g. Ksh 4,085). At the very least, you can invest it in Money Market Funds which are stress free and easily accessible, or channel it to other investment vehicles such as buying shares, real estate, business etc.