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INSURANCE & PENSIONS

Using Life Assurance To Protect Dependants From Eventualities

Nigerians generally have apathy for insurance, particularly life assurance. However, if one has dependants who may suffer lack when he is no more or has mortgages to pay for, then he needs a life cover. Nnamdi Duru writes

About Life Insurance
Life insurance (usually known as life assurance) is the type of policy that pays dependants of the policyholder a lump sum or regular payments if he dies.

Who Needs Life Insurance
Not everyone needs life insurance but if your spouse, children and other relatives depend on your income to cover the mortgage or other living expenses, then you need it because it will help provide for your family in the event of your death.
“If you have dependants – such as school-age children, a partner who relies on your income or a family living in a house with a mortgage that you pay – a life insurance policy can provide for them if you die,” the Association of British Insurers (ABI) observed.

Who Does Not Need It?
If you are single, or if your partner earns enough for your family to live on, you may not need life insurance. But, you may want to set aside enough money in savings to cover any funeral expenses.
If you have dependants but have an employee package that includes ‘death in service’ benefits, you may not need additional life insurance.

Death in service pays out a lump sum if you die while working for the company. Just check to make sure the benefits are enough to cover your family’s needs – if it’s not enough, you can top up with a life insurance policy. But do bear in mind, if you stop working for that employer, perhaps through ill health, you may lose the death in service benefits and may not be able to take out life insurance at that time.

Areas Not Covered
Life insurance only covers death; if you can’t provide for your family because of illness or disability, you won’t be covered.
Most policies have exclusions. The policy does not pay if the policyholder dies as a result of drug or alcohol abuse. Also, the policyholders normally have to pay extra to be covered when you take part in risky sports.

If the policyholder has serious health problem when you take out the policy, your insurance may exclude any cause of death related to that illness. You can buy policies which include other types of cover such as total and permanent disability and critical illness cover.

Types
There are different types of policies and the suitability of each depends on individual customers’ circumstances:

Term Assurance
Term assurance policies run for a fixed period of time such as 5, 10 or 25 years. This policy runs for a fixed term and will pay out a lump sum if you die during this term. If you don’t, you get nothing back. Term assurance is the cheapest and most popular type of life cover.

Level term life insurance is designed to pay a guaranteed amount which remains unchanged throughout the duration of the policy. There are both increasing and decreasing term assurances as well as convertible and renewable term assurances.
Other types include joint life insurance and inter-linked term life insurance where the premium has to be increased annually in relation to the retail prices index (RPI).

Whole Life Assurance
This is designed to provide cover for a life time. It guarantees a lump sum payment when the policyholder dies as long the payments are made continuously from the start of the policy. The lump sum is paid at any time and not within a fixed period as it is with term assurance.

The premium paid is usually split to buy life cover and build up investment reserve. The idea is that the investment growth in the early years subsidises the higher cost of life insurance as people age, thereby providing insurance for the whole of your life, as long as you pay the premiums. It should also mean there is a “surrender value” if the policy is cancelled.

Options for whole life assurance include without-profit which does not have any element of investment. The monthly premium contributes directly to the cover and beneficiaries do not benefit from any investment profits when the policyholder dies.
A with profit whole life policy is similar to a non-profit policy but the amount paid is the sum assured plus whatever profit that has accrued. Also, a low cost whole life policy guarantees that the amount paid out in the event of your death will be greater than the total sum on top of the bonuses.

Endowment
An endowment life insurance policy is the equivalent of a saving scheme with life insurance attached. They combine the benefits of a savings scheme with the peace of mind offered by a life insurance policy. These policies are often carried with mortgages.
If the policyholder dies during the term of the policy, their loved ones will receive a lump sum to help towards cover unpaid bills or mortgages, or to help towards funeral expenses. However, if the policyholder is still alive at the end of the term – usually around retirement or when a mortgage is paid off – they will usually receive a lump sum payout.

Generally speaking, this is linked to the stock market, so the amount you receive could be less than the amount you pay in.

Reviewable Policies
With non-reviewable policies the premiums payable are fixed from the start. With a reviewable policy, premiums are reviewed on a 10-year basis and can increase sometimes significantly to ensure the policy remains on track and will be able to pay out the expected lump sum.

In calculating whether the premiums may need to rise, the provider will look at the way in which the underlying investments have performed up to that date as well as taking into consideration the customer’s personal circumstances including health and life expectancy.

If a policyholder is unable or unwilling to increase the amount they pay in premiums at review time, they can either cash in the policy, or accept the policy will provide a smaller sum than they had thought at the outset.
So, consumers are advised to be careful when buying a whole of life policy because they can end up paying more into one of these policies than they will ever get out.

Premium Cost
If you are young or even not so young but still healthy, then you need a life insurance. Only a few Naira daily is all one needs to provide his loved ones with plenty of financial protection. The average premium is usually less than the price of a coffee or newspaper; though this varies from one company to another.

Critical Illness and Income Protection Policies
Life insurance covers the worst-case scenario but it is also important to consider how a person would pay bills and mortgages if he stops work as a result of illness or injury.
If you don’t have an employee benefits package to rely on or enough savings to get through an illness one then needs an income protection or critical illness insurance or both in place of life insurance if he has no dependants or an addition to life insurance if he has dependants.
Critical illness insurance pays out a lump sum or a regular payment, helping you cover a mortgage or other expenses, if you suffer from one of the illnesses or injuries specified on your policy. Critical illness policies have very strict criteria and do not cover things like stress or back pain, two of the largest causes of people stopping work.
Income protection insurance, covers a wider range of illness and disability, and gives regular payments until you recover enough to return to work, retire or reach the end of the policy payment term.
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