What is life insurance?
Life insurance is a contract between an individual or organization (insurance policy holder) and an insurer (insurance company). The policyholder pays the policy premium and the insurer promises to pay a designated beneficiary a sum of money upon the occurrence of an insured event. Depending on the contract, events such as terminal or critical illness may also trigger payment.
The core benefit of life insurance is that the financial interests of one’s family e.g. children’s education, remain protected from circumstances such as loss of income due to critical illness or death of the policyholder.
Why do I need life insurance?
Life Insurance not only provides for financial support in the event of untimely death or critical/terminal illness, but it also acts as a long term investment. With life insurance, you can still meet your goals such your children's education, their marriage, building your dream home or planning a relaxed retired life. This is all dependent on your life stage and risk appetite.
There are various types of life insurance policies that offer various benefits to the policy holder. They are explained below;
What are the common types of Life insurance?
- Term Assurance
This type of policy offers protection for a limited period. It is the simplest and cheapest form of life insurance since it only provides life cover with no investment benefits. The insurance company pays out the full sum assured if the policyholder passes away within the insurance period. No benefits are payable to the policy holder if they are still alive at the time of maturity of the policy.
An endowment policy combines both protection and investments. The insurance company pays out the full sum assured if the policyholder passes away within the insurance period. Upon maturity of the policy, or at the end of the insurance period, the maturity benefits are paid out including all the bonuses earned in the course of the policy to the policy holder.
- Whole Life
A whole life policy offers life-long protection and premiums are paid either throughout your life, as a single premium or ceases at a given age e.g. age 60.
- Unit Linked / Investment insurance policies
In unit linked policies part of the premium is used to purchase life protection and the rest is used to purchase units in an investment fund managed by the insurance company. The price of the units is based on the net asset value of the fund at the time of purchase. Return on the policy is linked to the investment performance of the managed fund.
- Last expense
This policy is meant to cater for funeral expenses of a policyholder or their family members in the event of their demise. The benefits are payable within forty eight (48) hours after notification.
Life Insurance Classes
Life insurance has three major classes namely: Group Life Insurance, Individual Life Insurance and Pension Plans/Retirement Benefits schemes.
1. GROUP LIFE INSURANCE
What is Group Life Assurance Cover?
Group Life Insurance is a product often undertaken by an organization for its employees. The policy document is in the name of the employer who also pays the premium to the insurance company. This type of insurance is also undertaken by other organized groups such as Chamas and SACCOs etc
Group life insurance provides for lump sum payments in the event that an employee dies while still in the service of the organization. This coverage will provide a benefit to the beneficiaries (next of kin) if the covered individual dies during the defined covered period.
As with other types of group benefits, group life insurance is cheaper than individual policies and hence why many organizations take it.
What are the benefits to employers?
- The aim of this cover is to aid employers or an organised group to alleviate the financial distress that might befall the dependants of an employee/member upon his/her death
- To enable employers to attract and retain high quality staff as the employees feel they are cared for
- Gives peace of mind to the employees and hence are more productive
- You are prepared to assist employees’ families at their most vulnerable time without necessarily incurring extra costs
- Provides a full proof 24 hours cover against death/disability resulting from accident and diseases.
- Automatic addition/deletion clause for members joining/leaving the scheme after commencement date
- Premiums paid on an employee’s behalf by the employer are not treated as taxable benefits
- Provides for a profit sharing option, where if no claim is made for a specified period of time, then the insurance company shares some of the profits made from the scheme.
What are the benefits to employees?
- The cover provides peace of mind and reassurance
- The family’s financial future is secured through the payments of the benefits in the case of demise of the bread winner.
- What is covered under Group Life Insurance
- Group life mainly covers Death from any cause(illness or accident)
- Optional added benefits include Permanent Total Disability cover (in the event an employee is permanently disabled and can no longer work), Last expense cover (this is a funeral expense cover) and a critical illness cover (in the event an employee is critically ill and cannot work)
2. INDIVIDUAL LIFE ASSURANCE
Individual life insurance policies are those policies that are taken out by individuals in a bid to protect their dependents in the event of their demise or illness.
Individual Life insurance policies normally comprise the following:-
- Protection policies – designed to provide a benefit in the happening of the insured event.
- Investment policies – policies where the main objective is to facilitate the growth of capital or the money paid in as premium.
2. PENSION PLANS / RETIREMENT BENEFITS SCHEMES
What is a Pension Plan or a Retirement Benefits Scheme?
Pension Plans (also referred to as retirement plans) are offered by insurance companies and fund managers to help individuals build a retirement fund. Upon maturity, this fund is invested for generating a regular income stream, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event.
Why plan for retirement?
- It is inevitable that as active as we may be today, there will come a time in life when we will have to retire. However our living expenses eg. food, medical, housing, electricity, etc do not retire. Hence, saving in a retirement benefits scheme as early as possible helps us save and create the much needed income to cater for expenses in retirement.
- Society has changed and we have witnessed a weakening of the family unit. The traditional systems that provided security in old age have almost vanished. It is now a reality that parents will not be able to depend on their children for their upkeep in old age. It is therefore wise to plan now for your retirement.
- Thanks to advances in the medical field, we are now able to live long lives. It is therefore important to plan for the money you will require in retirement to cater for the expected longer life.
- Tax benefits. Saving in a registered retirement benefits scheme is one sure way of keeping your savings safe from the tax man. Contributions to the scheme are tax exempt as per the set limits (Kshs. 20,000/- per month or 30% of salary, whichever is less) and the investment return earned is also tax exempt.
- A pensions plan provides a disciplined way of saving and the money is not readily available for withdrawal like money in a bank account.
Benefits of joining a pension plan?
- The contributions have a 100% capital guarantee. The retirement benefit schemes managed by Insurance companies are in form of guaranteed funds which means that the insurance company guarantees the capital put into the scheme plus a minimum rate of return.
- Contributions are flexible depending on your financial capability and your needs.
- Contributions are easy to make through payroll deductions, Direct Debits, Mpesa, etc
- The fund earns compound interest and over time this allows small regular contributions to grow to significant retirement savings.
- The member has the opportunity of saving for their retirement life hence improve their financial security in retirement.
- Pooling advantage. Funds from various members are pooled together to form a huge fund that is able to enjoy economies of scale in investments, resulting in higher returns.
- It offers consolidation of pension issues for individuals who are changing jobs. As you change jobs you can transfer your benefits to a Personal Pension Plan.
- Allows one to create a fund of which 60% may be assigned as a guarantee against a mortgage.
- The accumulated fund, plus investment income are payable to your survivors upon death providing a financial cushion in the event of your demise.
- Withdrawal terms are flexible with no penalties or hidden charges.
- An employer can contribute on behalf of the employee as long as the combined contributions do not exceed 30% of the employee's salary
- Contributions are tax deductible. The Income Tax Act allows for a maximum tax deductible contribution of Ksh 20,000 per member per month ( or 30% of your salary whichever is less)
- Income earned from investments of registered pension funds is tax free thus generating more funds for reinvestment.