Why should I buy a life insurance policy?

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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 a 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; and stands as an important pursuit, especially in the face of the future’s unpredictable nature.

What is life insurance?

Life insurance is a contract between a policyholder or the insured and an insurance company, whereby 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 is known as ‘life cover’ and helps to secure your family’s future needs by paying them a lump-sum amount in case of the policyholder’s death. However, in many life insurance policies,the insureds are paid an amount called ‘maturity benefit’ which is generally provided at the policy term’s end.

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 or survival at various ages. It is called a mortality table. This represents the 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 differs from person to person, year to year – and also between male and female. In Ghana, there are 21 life insurance companies which 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 rises over a certain time period, and on death of an insured the sum insured (compensation amount) is paid to dependents of the insured.

  1. Whole Life Insurance

Whole life insurance is the generic name for a 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.

  1. Endowment Policy

The endowment policy’s main feature is that the sum assured is payable on a fixed maturity date or on the earlier death of an insured or policyholder. It is a contract that has a cash-in or surrender value. Levels 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 therefore have a shorter period to run and hence to collect premiums; the shorter the tern, the higher the premiums.

Child education plans may be structured as an endowment policy. This provides coverage for a specified period, and upon maturity they pay out a lump-sum amount that can be used to fund the child’s education. For example, If Ama wants to provide a basic university fund for her 1year old son, she may take out a GH¢100,000, 15 years endowment policy. The funds will be available whether Ama lives or dies.

Importance of life insurance policy

Having a life insurance policy provides a lot of advantages, not only to the policyholder but also their dependents. The following are some 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 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 bonus accrued over the period the policy was active

  1. Safe and profitable long-term investment

Life Insurance is a highly regulated sector. The National Insurance Commission (NIC), the regulatory body, through various rules and regulations ensures safety of the policyholder’s money is the primary responsibility of all stakeholders. Life Insurance, being a long-term savings instrument, also ensures that life insurers focus on returns over a long-term and do not take risky investment decisions for short-term gains.

  1. Replace income for dependents

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 government or employer-sponsored benefits of the surviving spouse or domestic partner will be reduced after their companion dies.

  1. Loan against the policy

Many reputable insurance companies offer loans against life insurance policies at affordable rates. Based on 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.

  1. 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.

  1. Create an inheritance for heirs

Having a life insurance policy will enable individuals with no assets to create an inheritance for their family members by naming their heirs as beneficiaries.

  1. 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.

  1. Mortgage redemption

A life insurance policy can act as an effective tool to cover mortgages and loans taken by policyholders, so that in case of any unforeseen event the burden of repayment does not fall on the bereaved family.

How do I buy a 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 a life insurance policy by directly contacting their life insurance company. This can be done through phone calls, emails or a visit to the insurance company’s physical office

  1. 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 while insurance brokers are independent intermediaries who can assist you to purchase your insurance package from any insurance company of your choice. Most corporate organisations 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.

  1. 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 clients of the bank.

  1. Other digital platforms

Some insurance companies have designed digital platforms and mobile applications that enable customers to purchase life insurance policies in 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.

>>>the writer is a Chartered Insurance Practitioner (ACII-UK), an accomplished writer and author and an Associate in Risk Management (ARM) from The Institutes, USA. He has a decade of experience within the Ghanaian insurance industry and is currently a manager at Star Assurance Limited. He can be reached via +233249236939 and or [email protected] / [email protected]

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