The truth is very few people ever achieved financial wealth by winging it, so one has to take financial responsibility. I’ve been making conscious finance decisions since I was 16 when with a N5,000 gift I bought shares in Chartered Bank (now Stanbic IBTC); so as far as experience goes, I have about 10+ years “experience” so maybe I have an idea of what I’m writing about. Anyway, I digress.
“Money is a tool for getting to where you want”, and I hope this series can provide insight into guiding you there.
What is Life Insurance?
In its simplest form, life insurance is an agreement between a person (policy holder) and an insurance company where the insurance company agrees to pay another person (beneficiary) an agreed amount (benefit) in exchange for periodic payments (premium), upon the death of the policy holder.
To be clear, the primary purpose of a life insurance policy is for the benefit of a person (other than yourself). If I do not benefit from a life insurance policy, why should I own policy? Good question, that I can summarize in two reasons.
- To protect your family & people you care about: If you earn an income, after taking care of your personal needs/expenses, you probably have dependents. Think of your income as a tap that you baff with, your children & other dependents. If When you die, that taps dried. Then your children don’t have water to baff, and they are forced to go about begging for water or remain smelly if they don’t find a charitable tap. Do you want to be looking down from heaven seeing your smelly children?
- Inheritance: As an extension of the first benefit, a life insurance policy is a good way to create an immediate estate. The insurance company doesn’t just turn on ordinary tap for your beneficiaries when you die. It’s more like a jacuzzi. In addition, the benefits are not taxable because the premiums were made with after tax funds.
If you can beat your chest that none of the two reasons above appeal to you, you should stop reading now. Shalom! Otherwise, continue.
Since you are reading this, you are at least interested in one. Very good. Nigeria has abysmally low life insurance penetration [less than 3% in 2015] and the reason is not only because people cannot afford it. A large number have never even thought of it, because it is implied that you are thinking of death if you take out a life policy and God forbid that someone thinks of dying, you know “you shall not die but live”. It is probably also the same reason many die intestate – not having a will before one dies.
And it’s also not the case that life insurance is not affordable, because they are. For example:
AXA 20-year term life insurance with a N10million benefit for a 35yr old costs N81,400 annual premiums. It means you pay N1,628,000 over the 20 years and your beneficiary will be paid N10m if you die within that 20 years.
If you earn N100k monthly, that amount is less than 7% of your income. And if you are younger, the rates are lower. So what’s your excuse?
Question from the back: “BUT WHAT IF I DO NOT DIE WITHIN THAT 20 YEARS?”
My answer: “WHAT IF YOU DIE?” Because as we know “eyan le ku eni at any time” [Quote paraphrased].
Now there are two broad types of life insurance:
- Term Life Insurance: The simplest and most affordable type; the benefit is only paid to the beneficiary if the policy owner dies within the term. Typically, these terms are 20-, 30- and 35-year terms, but can be shorter. The logic is that life insurance is protect income which is highest in the 20 – 30 years of work. By the time I’m 60, I hope to (i) have very few people who depend on my income for survival and (ii) have built up sufficiently financial wealth to take care of myself and dependents (if any).
- Whole Life Insurance: As you guess, more expensive than term life, because here, the benefits are paid when the beneficiary dies at any time (and usually up to 100 yrs). Personally, I would not recommend whole life policies because the savings you make by taking a term policy can be invested and provide you better path towards your financial goal – simply put “buy term, invest the difference”.
There are also hybrid products like
- Investment/Savings products but provide live insurance up to a certain limit, so if you are the kind that wants to eat your cake and have it, you can do it with these products.
- Instant Plans, that cover death & medical expenses if you don’t want to commit to long terms. This product is especially great if you have a crystal ball and know at the beginning of the year if you will die, then you can purchase and instant policy and leave a gift for your beneficiary.
IMPORTANT: How much life insurance do I need?
There is no science but you can estimate and a good place to start is your annual salary. Because insurance is primarily for income replacement, a simple rule of thumb is to multiply your annual salary by 10.
Cover = Annual Salary x 10
It gets a little more complicate if you have children, debt, then you need to add tuition expenses, and your total debt to this figure, so you would have to work with your insurance agent to determine suitable amount.
In my opinion, the figure below is a something of a Maslow’s hierarchy of personal financial goals:
And owning a life insurance policy is the foundation of that financial dream because nothing is more important than protecting your income. If there is anything you should do after reading this, it is to look up life insurance quotes from insurance companies, reach out and get a quote with the intention to take out a policy. You get the best rates when you are younger so take advantage of savings your youth because “fun is like life insurance, the older you get, the more it costs”. To close, are you going to make sure the faucet remains flowing after you die? A good place to start will be researching quotes from AXA Mansard, AIICO, Leadway, FBN Life (to mention a few).
Author’s Disclosure: I have no positions in any shares of companies mentioned, and no plans to initiate any positions within the next 3 months. The article expresses my own opinions and there is no business relationship with any company mentioned in the article. Typos are regretted. The author is a home-maker and financial planner, a registered life insurance agent in Texas and is licensed to provide personal financial advice.