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Individual Retirement Plans vs. Life Insurance Policy

Sometime in early February this year, I saw a thread on Twitter where the OP was urging people to take their money elsewhere but Britam. 

Of course, I was concerned. I have an MMF account and an Individual Pension Plan account with Britam, and my first thought was, “I just might lose all my money with this firm.’’ Still, it’s not much, but it’d wreck some of my financial plans if anything were to happen. 

Honestly, I was not the only one. A simple scroll through that thread and Quoted Tweets introduces you to many disgruntled customers whose money seems to have “drunk water” from various products with the firm.  

 

 

So, why wouldn’t any Britam’s customer, existing or prospective, not have questions? The OP later published a well-detailed encounter with the company through their Medium account (you can read it all here). 

From that, I had a few takeaways for anyone thinking about retirement and saving for retirement.

There is a difference between an individual Retirement Plan and a Life Insurance Cover (Life Assurance). 

The OP seemed to have purchased a Life Insurance Cover under the insurance agent or advisor’s guidance, while all he wanted was to save for retirement. But things didn’t work out quite well because when he tried to terminate the service, the company would not refund his money (ouch!).

Individual Retirement Plan Vs. Life Insurance Cover

Individual Retirement Plan (IPP)

An individual retirement plan is an investment plan that allows you to save for your senior years. When you hit retirement age and cannot or do not want to continue working, you have a safety net in terms of income. A retirement plan allows you to save for that future income in advance, where your money still grows through compounded interest. 

There are two different retirement plans, a Provident or a Pension Plan. How much you access when you hit retirement age will depend on the plan you signed up for. 

With a Provident Fund, you can access your invested amount in a lump sum plus the earned interest upon retirement. But you only access one-third of your accumulated funds in a Pension Plan. With the remaining two-thirds, you purchase an annuity and receive regular income for the rest of your life or receive payments in installments within 10 years. 

Learn more in a related post: Individual Pension Plan; Why You Need One

Life Insurance Cover

On the other hand, you can consider a Life Insurance Policy as an insurance cover for your beneficiaries in the event of your passing. Most individuals who take this policy have beneficiaries who rely on them financially and would like them to be financially stable in their demise. The benefit payments will go to your beneficiaries, replacing the income you would have otherwise earned if you were alive.

And it doesn’t have to be just in death. Some of these policies have other events that could trigger the claim’s payment, like critical illnesses, terminal illnesses, or disabilities. It all depends on what the contract you have with your insurance company reads. 

Are we together so far? Individual Retirement Plans are all about you and only you when you finally get to that senior year, while a Life Insurance Policy is more about your beneficiaries if you are gone. As much as a retirement plan is all about you, your beneficiaries will still get your benefits if you pass on, so provide your beneficiaries’ details and update them when necessary.

A Little Bit More About Life Insurance

Now, a Life Insurance policy is a contract, and you have to pay the premiums diligently for that claim to stick when you die. Depending on the type of Life Insurance Cover, you can pay premiums for the specified term, which could be 10, 15, or 20 years, or whole life.

The benefits are only paid to your beneficiaries if you die. If you outlive the policy, like with the term policy, you will no longer pay premiums, and you will forfeit the money you’ve been paying to the insurance company. Yes, you will not receive anything from a term life cover!

Other plans, however, like an Endowment Policy, will pay you the benefits if you outlive your cover. If you do not, the beneficiaries get to enjoy the benefits of the policy.

I hope it all makes sense up to this point, but here is a table ( I have tried to simplify it a bit):

 

Individual Retirement Plan Life Insurance Policy
To provide you with income during retirement  To provide a payout to your beneficiaries in the event of your death or other specified events, unless it is an Endowment plan that pays you the benefits if you outlive the policy.
You access whatever amounts you’ve saved on achieving retirement age plus accumulated interest income.  Your premium payments must be up to date for the insurance company to honor the claim.  If you cancel the policy, you will only receive a specified percentage, not the whole amount you’ve been paying to the insurance company. Also, this payment will only apply if the policy meets the surrender or cash value, where the policy must have been in existence for a specified period for the insurer to pay you the surrender value. 
You can contribute as low as Kshs. 500.00 per month depending on your abilities Premium amount varies, depending on many factors, like your age, health status, and length of the cover 
You can access your personal contributions but not your employer contributions before retirement age. You only access 50% of your employer contributions.  Unless it is an Endowment Plan that pays you the benefit upon maturity and you’re still alive, with other plans, only your beneficiaries will benefit when you die, not when you are still alive. 
Your retirement contributions are tax-deductible up to Kshs. 20,000.00 per month or one-third of your income (whichever is higher) - that’s a maximum of Kshs. 240,000 per year at the moment.  Has a tax relief of 15% of the premium amount, or up to Kshs. 5,000.00 per month (Kshs. 60,000.00 per year) at the moment. 

 

The Devil is in the Details

Now, back to the OP; they purchased a Life Insurance Plan instead of a Retirement Plan product. From that whole conversation oN the article, they believed they were contributing towards a retirement plan, whether pension or provident plan. A bit ignorant on their side, a lesson learned the hard way. 

This leaves one wondering, how many Kenyans out here purchase the wrong product from these financial institutions because they do not know what they are getting into? Many, if you ask me. And when it comes to retirement planning, most of us have no idea what they are doing.

Learn more in a related post: 5 Key Steps to Safe Retirement Planning

Most of us will mostly believe the sales agent and probably not think twice about shopping elsewhere and comparing products from different institutions. 

That leads to such investments; getting what you had not planned for, which ends up costing you, most if not all your hard-earned money. 

Which I cannot fault anyone fully, really. When an agent is bent on selling a product just to meet targets, even at the expense of miseducating or misleading the client in any way is probably what’s causing all this. Is there a code of conduct against such behavior? 

The bottom line, Individual Retirement Plans are different from Life Insurance Policies. If you are planning for retirement and need some income for those golden years, a pension or provident plan is what you need. But if you want to protect your beneficiaries in the event of your untimely death, get a Life Insurance Policy. 

Also, read every document you get from your insurer or investment company. Take every investment advice and the product you get with a pinch of salt, and compare every product any institution offers you with what their competitors offer. 

Most importantly, get a personal financial advisor who can advise on products you do not understand. When applying for any product from an investment institution, insist on getting a personal advisor whom you can communicate with regarding your investment goals and portfolio with the institution.  

DISCLOSURE: THE INFORMATION PROVIDED TO MY READERS IS GENUINE AND PRECISE TO THE BEST OF MY KNOWLEDGE. THE LINKS PROVIDED IN THIS ARTICLE DO NOT BELONG TO ANY AFFILIATE PARTNERS AND I AM NOT PAID FOR THEM.

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