In my last article, I talked about the difference between a life insurance plan and a retirement plan, thanks to a horrific experience I saw on social media. Now that you know where each of these applies, cushioning your beneficiaries after your death or for you to earn income during retirement, let’s look deeper into life insurance.
Honestly, the insurance industry is quite intimidating. I know it is for many others. Most of the time, people will just lay their trust in their insurance agent and hope they act in their best interest. But just because your insurance throws a policy at you doesn’t mean it is worth buying.
The only insurance policies I am interested in and really care about are my health insurance and home insurance.
Now that I think about it, it all narrows down to my lifestyle and situation. If I had kids or a car, I’d definitely be thinking about other policies, like auto insurance, education policies, and, of course, life insurance.
That’s the thing about risk management; it differs between individuals. If you are the breadwinner in your family or have beneficiaries that would suffer if you were to pass on, your insurance priorities are different from mine. That’s where a life insurance policy comes in for you. It is not a must-have, though it is highly encouraged for risk management.
Learn more in a related post Are You Covered in 2021? Here Are 4 Must-Have Insurance Policies
You don’t buy life insurance because you are going to die, but because those you love are going to live.
– Unknown Author
If you decide to take a life insurance policy, here’s what you need to know:
Types of Life Insurance Plans in Kenya
There are 3 main life insurance policies: whole life, term life, and endowment plans. But in each of these, there are other variations.
I have also noticed that some Kenyan insurers will not label the product as either term or whole life. They have different names, but the policy will basically fall under either of these categories. Ensure you go through the policy features and understand the benefits and limitations before buying the policy.
1. Whole Life Insurance
This policy remains in place your entire life. It is more of a permanent product that lasts until your demise. You will be required to keep paying premiums throughout this period, which are usually constant for the payout to your beneficiaries to happen. However, some firms will require the payment of premiums until a certain age, like 80 years.
With this cover, you get to enjoy some of the money while you are still alive in terms of dividends.
2. Term Life
Also referred to as pure life insurance, it is a life insurance cover that guarantees full payment to your beneficiaries if you die within a particular period. It could be a 10-year cover, 15 years, or 20.
Other insurers will offer term life products in terms of age, like a term to age 50 or 55. Watch out for the premiums on such a policy, as most increase the premium rates as you age. With time, the premiums could be too high for you to afford.
Firms offer different terms, but the period is always limited compared to the whole life option. You can also cancel the policy but after a specified period. However, keep in mind that surrendering the policy will only get you a surrender value, not all of the remaining policy’s cash value.
This type of policy has no investment benefits. As such, you get no payouts during the term of the contract. And, if you outlive the policy, you and your beneficiaries will not receive any payout.
3. Endowment Plans
It offers the best of both worlds- protection and investing. An endowment plan is more of a term life policy but with an investing component. If you outlive the policy, you will receive your maturity benefit in full, including all the accumulated bonuses. If you die before the policy matures, your beneficiaries will still receive the assured amount in full.
What Policy Suits You?
I cannot tell you that whole life insurance is better for you than term life. Again, we all have different circumstances, and each policy has its pros and cons.
If you are looking for a more affordable option with lower premiums, term life could be ideal. But if you are worried about outliving the policy, maybe consider an endowment plan so you can benefit from the investment component. If you are looking for dividend payouts while you are still alive and long-term protection of your beneficiaries, consider getting whole life insurance.
The key thing is understanding your needs and future outlook.
You also need to understand the details of your policy before committing, including:
- Duration of the policy
- The premium payments and how often you need to pay
- The terms and conditions of the policy, e.g., cancellation or how to make changes to the policy.
The Bottom Line
Risk management is a vital part of personal finance management, whether you are taking auto insurance, home insurance, or life insurance cover. Insurers in Kenya will offer you different life insurance products, but they will be either whole life, term life, or endowment plans.
There are other products within these, and the names of the products may vary from one insurer to the other. Ensure you understand the product you are buying and what your policy entails. Also, pay attention to other beneficial features of the product, like the ability to get credit against your cover, funeral benefits, or payment of medical expenses.
The rule in investing and buying financial products is, if you do not understand it, then it is best to leave it.