Importance Of Life Insurance - A Focus On Nigeria

Importance Of Life Insurance - A Focus On Nigeria

My last visit to Nigeria was an enjoyable one. Catching up with classmates that I had not seen for a very long time.

I was also given the opportunity to deliver a presentation on the importance of financial education and taking keen interest in our personal finances.

It was challenging and equally interesting to research the financial products that support personal finances in Nigeria as I was more used to writing about UK finances and products. However, a couple of things came out of our financial conversations which I believe were universal. These include

  • Having a rainy day or emergency fund

  • Investing in mutual funds for the family and with a long-term mindset

  • Investing for retirement

  • Investing for kids, and finally

  • Having insurance in place for life and/or critical illness

I have written extensively about the first four topics and these can be found on my blog web page. Therefore, focus of this piece is to address the fifth point, life insurance.

An unexpected death of a loved one can be absolutely devasting and is always long lasting, as was the case when I lost my dad at a very young age growing up in Nigeria.

The financial impact can also be significant in the case where the person is the main provider of financial support for the family. Therefore, having a life insurance policy helps provide financial continuity and stability for your family after such an event.

The next couple of sections will help you understand the basics of life insurance also dispel the myths surrounding the lack of take up of these sorts of policies.

Why life insurance?

Life insurance policy is a transaction where you as the policyholder pay a one off or series of payments called premiums and in return, a lump sum is paid out to your loved ones (or selected person) in the event of your death. The lump sum paid out is usually significantly greater than the premium paid.

It sounds a bit harsh that you pay premiums and you are not around to enjoy the benefits of the lump sum paid out. This has been cited as one of the reasons for a low take up rate.

However, it is important to remember that the idea is to provide financial stability and continuity for your family especially in a country with a relatively low life expectancy of about 55 years for a male born in 2016 (with women expecting to live 1 year longer on average).

Basically this means that a boy born in Nigeria today is on average expected to live for only 55 years. I say “only” because our next door neighbour, Ghana has a life expectancy of 65 years and most western countries have life expectancies in the 80s.

On a more positive note, group life insurance is now compulsory if you are in employment as stipulated by the Pension Reform Act 2004 amended in 2014. As such you may already have life insurance in place but note that this only pays out benefit of three times your annual salary and may not be adequate for the sort of financial continuity you plan to provide for your family.

What type of life insurance should I take out?

This is where it’s extremely important to speak to an adviser and be very clear with them what’s important to you and your family.

As an example, you may want a life insurance policy in case you die within the next 20 years while your kids are still young. Your rationale may be that if they are older than 20 years then they could fend for themselves so no need for a policy after that time. In which case you could take out a Term Insurance policy for 20 years.

The second type of policy is a Whole of Life insurance policy. This will pay out a lump sum benefit in the event of your death at any time. So it covers the Whole of your Life.

How much do you want your family to get?

The idea of a life insurance is to pay out benefits to provide future income for your family in the event of your death. How much should this benefit be? The financial term for this is sum assured. It really depends on your household expenses and my rule of thumb is as follows

  • Calculate all your household expenses per year

  • Make sure to include all expenses including school fees and healthcare cost. Be as thorough as possible

  • Allow for 10% contingency. Basically, increase your total value by 10%

  • Then multiple this number by 20 (or whichever multiplier you decide upon) to give an estimate of total amount required to provide income over a long period after your death

  • For example, if your total expenses allowing for 10% margin is NGN150,000 per month which equates to NGN1,800,000 per year

  • This means you may want to buy a policy that pays out NGN36,000,000 (20 x NGN1,800,000) in the event of your death

  • The more the sum assured is, then the greater the monthly premium you must pay so best to adjust the sum assured accordingly

How much should the monthly or one-off premium be?

Once you know what your sum assured is, you can get a quote from one of the top insurance providers to find out how much premium you need to pay. I have set out a sample policy below for illsutration and plan to update this section more once i receieve further information requested.

AXA Mansard's Term Life insurance on Jumia

This policy also offers medical expense benefit (in the event of an accident) in addition to the traditional life cover.

The description states that if an accident occurs, you get 5% of the sum assured chosen as medical expense benefit for your hospital / medical bills. We are not told if the medical expense benefit is a one off but other features include

  • Premium payment is made once

  • Premium payment is tax deductible

  • No medical tests required at inception

  • Anyone can buy Several policies. HOWEVER, they will be subject to medical exam once total sum assured Reaches N10m

  • Age range at policy inception is 18 - 50 years

  • 3-month window open for upgrade to higher sum assured

  • Low, fixed premium, based on the length and amount of coverage chosen


Duration / Cover Period

Premium (NGN)

Sum Assured

Sum Assured

Demise (NGN)

Medical Expense (NGN)

3 Years

15,000.00

1,000,000.00

50,000.00

5 Years

21,000.00

1,000,000.00

50,000.00

10 Years

35,000.00

1,000,000.00

50,000.00

How can I access a reputable insurance company

This is another factor contributing to the lower activity in the life insurance space compared to non-life (motor, property and other forms of insurance). The questions around reputability and payout of claims still persists and I believe the industry has a lot of work to do to ensure consumers are confident that

  • The insurance company will pay out benefits in the event of a death

  • The policy arrangement is still protected if the insurance company becomes insolvent (goes into bankruptcy)

As this is one of the main concerns raised by those i had conversations with, I have set out a list of questions to ask the broker or your adviser before signing up for one of these products

  • What is the pay-out rate for the product you are taking out (Basically what percentage of policyholders get the benefits they are paying premiums for. The higher the better)

  • What can you do with to ensure your family’s chances of receiving a pay-out is increased

  • Does the insurance company have a good history of customer services

  • What if the insurance company goes insolvent what happens to my policy

  • Is the company a Registered Insurance Company, which is licensed and authorised to conduct Life Insurance Business by National Insurance Commission (NAICOM)

This is by no means an endorsement of these insurance firms but a list of top insurance companies can be found here and include AIICO, AXA Mansard Insurance Plc, Leadway Assurance Company Ltd, Mutual Benefits Assurance PLC and much more.

Summary

I know that there is still a mindset shift that is required to get people investing in a life policy. However it is one of the best products that can help smooth out financial stress in the event of an unexpected death. It frees the family to focus on grieving for their loved one instead of doing that and worrying about how finances will stack up going forward.

The cost of the policy or premium is usually insignificant compared to what is potentially paid out. There I say that the cost of the premium is equivalent to a few bottles of beer and plates of pepper soup a month.

I understand that the insurance industry needs to work hard to dispel the myths around such policies and insurance in general but things can be sped up if more people take participate and also demand accountability. Finally the pension commission has done an excellent job in ensuring that there are at least mandatory group life policies in place to provide a minimum.

As we come into the new year, make this one of your goals or resolution to you’re your financial affairs in order. To my school colleagues I went to visit, I suggested they acted now and acted soon as such policies are cheaper when you are younger.

Good luck as you navigate through your quest for better living and always know that I’m here to help answer questions or research other areas to help provide that vital financial education that is needed.

Further Resources

  1. Life Insurance in Estate Planning

  2. List of insurance brokers with current licence from NAICOM

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