Insurance option for the middle aged – Francis Ewherido
In fulfilment of our promise two weeks ago, and for the third consecutive week, we continue our focus on middle-aged men, who have not yet prepared well for their retirement. The broad options for preparation for retirement are cash reserves, real estate, stocks, gold and other precious stones, treasury bills and money market instruments, among others, but I want to restrict myself to insurance, which is my turf. Ab initio, let me quickly chip in that cash reserves are very important in retirement and old age. This is because it comes handy when there is an immediate or urgent matter to take care of and there are many of such in old age. There are some old people who are suffering today because they are asset rich and cash poor. The buildings are there, but tenants are not paying rents; the land is there, but no one is buying. Sometimes, it takes time to dispose of a building or land. If money is needed for an emergency, it can be a problem.
Insurance is in two parts, Life insurance and non-life insurance. While non-life or general business insurance is basically for protection of assets, life insurance is for protection and investment. Wealth stands on a tripod: wealth creation, wealth sustenance and wealth protection. The three are equally important. If you do not create the wealth, then you cannot have it; if you do not sustain it, you are back to square one, and if you do not protect it, you can lose it all and also be back to square one. So, in preparing for retirement/old age, insurance, as a tool for protection, helps you to protect the wealth you have created and sustained.
But our emphasis today is on life insurance as an investment tool. When you are middle-aged and you still have no concrete financial fall back, two issues preoccupy your mind: your family and life in retirement/old age. Either way, life insurance comes handy. We are going to deal with life insurance under term assurance, whole life assurance and endowment. Term assurance is a policy with a fixed life or term during which the policyholder pays premiums periodically (i.e. monthly, quarterly or annually). When the policy expires, the obligations of the assurance company also end if there had been no incident. But where there are obligations, for instance, death of the policyholder, the assurance company pays benefits to the named beneficiary of the assured. In other words, in term assurance, the policy holder takes the policy for the benefit of others. If the policyholder dies before the expiration of the policy, the beneficiary gets paid the sum assured. For instance, if a policyholder takes a term policy for N50m sum assured, the beneficiary receives this sum if the policyholder dies before the expiration of the policy. That is a good sum of money to leave behind for an average family. Term assurance is the cheapest of life policies and cheapest way to create instant estate for loved ones and dependants.
Remember we said earlier that middle-aged men’s two primary concerns are their families and life in retirement. So term assurance takes care of the financial needs of the policyholder’s family if he dies prematurely. But some people wonder why they should take a policy that only provides benefits for their families on their demise and nothing for them while they are alive. We (insurance professionals) normally advise such clients to take a combined term assurance policy and personal accident policy. The personal accident section of the policy will pay benefits to the policyholder in the event of an accident, where he suffers temporary disability or permanent disability, like losing a limb or sight or extreme cases of spinal cord injury.
Medical expenses can also be incorporated to take care of medical bills for treatment of injury sustained in an accident. The payout can be N10m, N50m, N100m or more depending on the sum assured. The premiums paid by policyholders vary, based on the scope of cover, with factors like age, general health, and nature of work, primarily determining the premium rates. The cost of term assurance increases as the policyholder gets older. Typical amounts paid out under term assurance include: lump sums, funeral expenses, education fees for dependents, among others. You will recall that we treated one of such term assurance education products a few weeks ago.
Whole life assurance is more encompassing that term assurance. In Nigeria, insurance companies cut off age for term assurance is between 60 to 65 years. They scarcely go beyond 65 years. But whole life assurance offers hope for men above 65 years. As long as you pay your periodic premium, whole life assurance covers you for your whole life and pays benefit to your beneficiary at death. But like term assurance, it offers no personal benefit to the policyholder.
Endowment life assurance, on the other hand, is a policy that offers both death benefits and maturity benefits. In other words, if the policyholder dies before the policy matures, his beneficiary is paid the full sum assured irrespective of how much premium he had contributed before his death. For instance, a man takes a life policy with a sum assured of N100m that will mature in 15 years. After paying just N12m naira premium he dies two years after the inception of the policy. His beneficiary will still be entitled to the whole N100m sum assured. But if he lives and pays his premium until the policy matures, he gets the N100 maturity value.
On receipt of their sums assured, some policyholders transfer their money to a retirement savings account in a bank from where they pay themselves periodically, and also meet other age-induced expenses. Some others take annuity. “An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors, who want to receive a steady income stream in retirement.” In other words, the annuitant (investment owner) will be paid periodically (like receiving salary or pension) probably until he dies. This ensures that he maintains his lifestyle even in retirement.
One of the advantages of endowment policies for middle-aged people is that it forces them to do what they have not been doing all their life: saving and planning. It can be inconveniencing and “suffocating” at the beginning, but over time, you adjust. Another major advantage is that unlike term assurance, where the premium increases, as you grow older, the premium of whole life assurance, while high, does not increase over time. Once the terms are agreed the premium will remain the same throughout the duration of the policy. Also, unlike term assurance where the policyholder gets no benefit if there is no incident, endowment policies get benefits when their policies mature.
There is a lot more for those planning their retirement via insurance to know. My advice to them is to approach a Registered Insurance Broker (RIB) for guidance, especially now that the insurance industry is undergoing transition. Get professional guidance. The beauty is that the services are free; no RIB will ask for money before giving you professional advice.
On the whole, what we have tried to do in the last three weeks is to sensitise middle-aged people, who have not put a retirement plan in place to do so. They say what cannot break you can only strengthen you. You either allow Nigeria to break you or toughen you. The option is yours. You still have time to plan for a self-determined old age in financial stability.