WHY SHOULD I BUY LIFE INSURANCE POLICY?
BERNARD AKYIN-ARKOH, CPCU, ARM, ACII, EMBA
2nd Runner-Up, AIO-YIPs 2024 NextGen Awards ||2024 Young Achiever Award Winner @ Ghana Insurance Awards||Chartered Insurance Practitioner (CII-UK) || Author || Insurance & Risk Management Consultant||
INTRODUCTION
Have you ever asked yourself the following questions?
1. What is life insurance?
2. What are the various types of life insurance?
3. Why do I need life insurance as an individual, family or a business owner?
4. How do I buy life insurance policy?
This article will help you find answers to these questions and many more.
Beyond being a financial instrument, life insurance becomes a cornerstone for individuals and businesses, offering a sense of security that extends far into the future Securing one's life, as well as the lives of cherished family members, stands as an important pursuit, especially in the face of the unpredictable nature of the future.
WHAT IS LIFE INSURANCE?
Life insurance is a contract between a policyholder or the insured and an insurance company, where the policyholder pays the premium and receives a sum of money, upon the death of the insured (paid to beneficiaries) or after a certain period. The sum of money which is known as the life cover helps to secure your family’s future needs by paying them a lump sum amount in case of a death of the policyholder. However, in many life insurance policies, the insureds are paid an amount called maturity benefit which is generally provided at the end of the policy term.
Under a life insurance contract, an agreed sum called SUM ASSURED becomes payable, if the insured event takes place in the manner as stated in the policy. The insurer charges 'appropriate premium to cover the risk involved. Since premium is the price charged for covering risk, on human life, it must be sufficient to cover the cost of risk involved. In life insurance, the product insured is 'human life'. It is quite difficult to judge accurately the exact cost of risk involved. Therefore, a tool is developed to arrive at the chance of death of survival at various ages. It is called a mortality table. This represents experience of assured lives who have been insured for one year or more with the insurer. Mortality denotes rate of dying at a particular age for a period of one year. Mortality would differ from person to person, year to year and also as between male and female. In Ghana, there are 21 life insurance companies who underwrite various life insurance policies.
Types of Life Insurance
Life insurance can be grouped into three main types which are term insurance, whole life insurance and endowment policy.
1. Term Insurance
Term insurance policy deals with insurance against death but has no investment component. It is typically taken for a specified period of time. The premiums are generally high in comparison to the other types of insurance such as permanent insurance. The amount paid as premium gradually rise over a certain time period and on the death of the insured, the sum insured (compensation amount) is paid to the dependants of the insured.
2. Whole Life Insurance
Whole life insurance is the generic name for cash-value policy that provides lifetime protection. This is a type of life insurance policy with an investment component. Under a whole life policy, the policyholders are eligible to get protection throughout their life and also receive returns on the investments component. It is usually preferred by policyholders with long term investment goals who also desire alternative sources to meet emergency financial needs.
A funeral finance plan is structured more like a whole life insurance policy, as it provides coverage for the insured's entire lifetime, and often includes a savings or cash value component that can be used to cover funeral expenses.
3. Endowment Policy
The main feature of the endowment policy is that the sum assured is payable on a fixed maturity date or on the earlier death of the insured or policyholder. It is a contract which has a cash-in or surrender value. Level of premiums are payable throughout the policy. Premiums on endowment policies are higher than those of whole life policies as a set maturity date means that a majority of claims will be made earlier and will therefore have a shorter period to run and hence to collect premiums, the shorter the tern, the higher the premiums.
Child education plan may be structured as an endowment policy. This provide coverage for a specified period, and upon maturity, they pay out a lump sum amount which can be used to fund the child's education. For example, If Ama want to provide a basic university fund for her 1year old son, she may take out a GHS 100,000.00, 15 years endowment policy. The funds will be available whether Anna lives or dies.
IMPORTANCE OF LIFE INSURANCE POLICY
Having a life insurance policy provides a lot of advantages not only to the policyholder but to their dependants. The following are some of the major benefits of any life insurance policy.
1. Death Benefit
This is one of the primary benefits of a life insurance policy. If the insured person meets with an untimely death, then the nominee receives compensation from the insurance company in the form of a death benefit. The compensation amount is usually the sum assured plus any bonus2 accrued over the period the policy was active
2. Safe and Profitable Long-Term Investment-
Life Insurance is a highly regulated sector. National Insurance Commission (NIC), the regulatory body, through various rules and regulations ensures that the safety of the policyholder's money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
3. Replace Income for Dependants
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If people depend on an individual’s income, life insurance can replace that income if the person dies. The most common example of this is parents with young children. Insurance to replace income can be especially useful if the government- or employer sponsored benefits of the surviving spouse or domestic partner will be reduced after their companion dies.
4. Loan Against the Policy
Many reputed insurance companies offer loans against life insurance policies at affordable rates. Based on the provisions of the policy, you can borrow up to a certain percentage of the sum assured. This can help manage financial exigencies without having to dip into your savings.
5. Pay Final Funeral Expenses
Life insurance can pay funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
6. Create an Inheritance for Heirs
Having a life insurance policy will enable individuals with no assets to create inheritance for their family members by naming their heirs as beneficiaries.
7. Create a Source of Savings
Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan.
8. Mortgage Redemption
Life insurance policy can act as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family.
HOW DO I BUY LIFE INSURANCE POLICY?
The most common channels to purchase any life insurance policy are:
1. Directly from your insurance company
Individuals, family and businesses can purchase life insurance policy by directly contacting their life insurance company. This can be done through phone calls, emails or visit to the insurance company’s physical office
2. Through an insurance agent or broker
Life insurance policies can also be purchased through an insurance agent or a broker. Insurance agents sell for one insurance company whiles insurance brokers are independent intermediaries who can assist you to purchase your insurance package from any insurance company of your choice. Most corporate organizations use the services of insurance brokers because of the extra professional services they provide. Accredited agents of a particular insurance company can also be used.
3. Bank-Led Channel
Policyholders can also buy life insurance policy through their banks. This arrangement is known as bancassurance. Bancassurance is a partnership between banks and insurance companies that enables insurance companies to market and sell their insurance products to the clients of the banks.
4. Other digital platforms
Some insurance companies have designed digital platforms and mobile applications that enables customers to purchase life insurance policies at the comfort of their homes and offices.
Conclusion
In conclusion, the presence of life insurance offers far-reaching benefits beyond mere peace of mind for the policyholder and their family. While undoubtedly providing a sense of security in the face of life's uncertainties, life insurance also serves as a potent tool for building savings and facilitating future investments. The accrued value within a life insurance policy can serve as a valuable asset, offering a reservoir of funds that can be tapped into for various purposes, including educational expenses, homeownership, retirement planning, or even entrepreneurship ventures.
REFERENCES
Karve S.L (2009), Principles of Life Insurance (2nd ed.), Himalaya Publishing House
Abor J.Y (2018), Financial Market & Institutions: A Frontier Market Perspective, Digibooks Ghana Limited.
Insurance, Claims, Risk and Project Management Analyst (ACII, MSc. Project Management)
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Snr. Underwriting Officer at Quality Insurance Company Ltd
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