At one time we have all met financial advisers advising us about various investment options. We get lost at deciding the best possible investment decision; be it long term or short term. Some agents may even try to sell you cash-value policy as a way to invest in retirement. But does investment in an insurance product make financial sense?
When you buy an life policy for instance, what you are simply doing is placing money in a reserve so that it will be used in future given that no one knows the future. By doing so, you are transferring the risk to the insurance company and in the event of your death or permanent disability, the insurance company will assume that you are perfectly normal and meet the cost of the premiums you would have paid had you been okay.
So what happens if nothing happens to you in the entire lifespan of the policy up to maturity? You will pay all the premiums, right. So will the insurance company pay you all the money you invested with them? Some policies will pay you bonuses in addition to the sum assured, this then is what we call maturity value. Plus in Kenya KRA will give you a tax relief of 15% on your annual premiums.
However, if you default on paying for your policy you will lose a higher percentage of your total premiums, the difference being assumed to be the monies spent by the insurance company to carry the risk of insuring you. If you cancel before 36 months, you will lose all the premium monies you had paid, the reasoning being you defaulted (repudiated) on the contract and that the monies were not sufficient to carry your risk. Note that on taking a policy you will pay a policyholder compensation levy of 0.45% of the premiums and ksh 40 stamp duty and ksh 200 administrative fee.
My verdict is life insurance, while it may sound like a good investment strategy, isn’t the best way to grow wealth. Therefore, it is best buy a life policy as a risk mitigation strategy and not an investment strategy. Your benefits will be tax exemptions, bonuses and risk transfer. Make sure to ask about the sum assured, bonuses, maturity value, tax relief certificates, cancellation terms and death and disability benefits before placing pen on paper to sign that policy.
About Author
Hillary Chepkoi is passionate about matters of insurance and is also a business analyst. He can be reached on hchepkoi[at]gmail[dot]com
