Cash value life insurance policy in Kenya is less used naturally. Kenyans are more familiar with endowment policies, Investment-linked insurance plans, whole life policies, education policies, and savings plans with insurance benefits.
All those terms fall under the cash value life insurance policy, as we shall see later on in this article as we bridge this global term with the Kenyan insurance market.
Many Kenyans nowadays are looking for insurance products that combine life protection and savings. They want life protection from permanent disability due to illness and accident and death and at the same time get some cash to meet their long-term goals. These insurance products are known as cash value life insurance products.
What Is a Cash Value Life Insurance Policy?
A cash value life insurance policy is a type of life insurance that has two elements in it:
- It gives you or your family a payout if you become disabled as a result of illness or accident or if you die.
- It also builds savings over time that you can use while still alive, paid at maturity or within the policy term as stipulated in the policy documents.
Part of the contributions that the policyholder makes regularly, either monthly, quarterly, semi-annually or annually, known as premiums, goes to life protection while the other part goes to savings. This savings part is called the cash value.
In life insurance, we have pure life insurance and savings -based life insurance.
- Pure life insurance only provides financial protection. All the premiums you contribute towards financial protection. If the policyholder/insured dies, the beneficiaries receive a payout but there are no savings or cash value benefits. A good example is term life insurance.
- Savings-based life insurance provides a life cover while at the same time building cash value or savings over time payable to the policyholder upon maturity. A good example of savings-based life insurance is an endowment policy.
In cash value life insurance you can sometimes borrow against the cash value or withdraw.
How Cash Value Life Insurance Works in Kenya
To start a cash value life insurance policy in Kenya, you just enroll for one with an insurance company, and start paying the regular contributions/premiums.
Some part of the premiums go to financial life cover and the other part to building a savings or investment.
Over time, the policy accumulates value and at the end of the policy term, maturity benefit(s) is paid to the policy holder. Sometimes, the maturity payouts are paid as bonuses spread over the policy term. A good example of a cash value life insurance policy that pays maturity payouts as bonuses is Boresha Elimu education policy.
Boresha Elimu pays 3 equal bonuses at the end of the last 3 years of the policy term.
For some cash value life insurance policies, you must contribute regularly without stopping until maturity. However, despite being so strict on making the regular contributions/premiums, most policies define or stipulate routes of opting out.
One is cash surrender value and the other one is the paid up option when the policy is beyond a particular stage.
A cash surrender value is determined by the insurance underwriters and is usually less than the accumulated savings. You get penalised for exiting before policy maturity.
A paid-up option is where you are unable/unwilling to contribute further and you let the money stay with the insurer until the specified maturity date of the policy. This is the best choice if you are not able to continue with your policy. Your savings will grow but the sum assured/maturity payout will be less than before.
Types of Cash Value Life Insurance Policies in Kenya
- Endowment Policies
Endowment policies are the most common in Kenya, for example life insurance education policies.
They are savings-based life insurance policies, combining elements of cash value and life cover.
Benefits are paid at maturity, when certain events occur, or within certain stages of the policy term.
In case of disability of the policyholder, most endowment policies waive the premiums when the unfortunate event occurs and pays the maturity benefit(s).
If the policyholder dies, maturity payouts are made to the nominated beneficiary and when the death occurs, premiums are waived.
If the policy has bonuses, these bonuses are paid at certain stages of term as defined by the policy documents.
You can use this cash value life insurance calculator to do financial planning and understand how they work.
- Whole Life Insurance
A whole life insurance policy is a permanent life insurance policy that provides lifetime coverage and also builds a cash value over time.
The policyholder pays regular premiums to keep the policy active.
The policy cash value usually grows at a particular rate, a constant rate defined by the insurer. This cash value can sometimes be accessed by the policyholder through policy loans or withdrawals.
When the insured/policyholder dies, the nominated beneficiaries are paid a death benefit.
- Investment-Linked Policies
Investment-linked policies are life insurance plans that combine insurance coverage with investment opportunities.
A small portion of the investment is used for life insurance while the rest of the fund is invested in instruments such as bonds, stocks, or balanced funds to help grow your money over time.
The growth of your money depends on the performance of the investments, determined by market conditions.
An example of an investment-linked policy is Britam’s Imarika Investment plan. This unit-linked plan has an inbuilt last expense of KES 100,000 and it is the feature that makes it an investment-linked policy. Some very small portion of your funds goes to the last expense while the rest of the fund is invested.
It does not attract withholding tax.
- Education Insurance Policies
Education insurance policies are endowment policies combining life cover and a long-term savings plan with a purpose of helping parents build an education fund for their children.
This education fund’s purpose is to clear future school fees of your children and related costs.
These savings-based insurance policies pay school fees at certain education stages that the parent targets, for example CBE’s junior and senior secondary or IGCSE lower secondary, O-level and A-level.
If the parent dies or becomes permanently disabled, the policies may continue supporting the child’s education through built-in insurance benefits.
Most education policies maturity payouts are paid in parts to over school for each year of the level targeted.
For example Msingi Poa pays 4 bonuses in the last 4 years of the policy term, hence covering 4 years of school fees and related costs.
Msingi Poa is suitable for IGCSE O-level and A-level combined or tertiary level that requires 4 years of school fees to complete.
For education planning, use this education insurance policy calculator and to understand how these policies work.
Benefits of Cash Value Life Insurance
Cash value life insurance policies have quite many benefits that improve your financial life and that of your family.
- They encourage disciplined saving which may lack in an open savings which may result inability to realise your financial goals
- Provides financial protection against permanent disability and includes a death cover.
- Can help fund future education of your children
- They help in long-term wealth accumulation and are not taxable.
- Some policies offer loan facilities (policy loans) with friendly interest rates.
- They are useful for estate planning by providing money that can be used to support beneficiaries, settle debts, pay taxes, or cover funeral expenses after death.
Disadvantages and Risks
Though so beneficial, they have their challenges, just like everything else in this world. They are not perfect.
- Because contributions are used for life cover and savings, they tend to have higher premiums than term life insurance.
- If you opt out before the end of the policy term your savings will be subjected to early surrender penalties.
- Returns may be lower than other investments, if and only if the market conditions are good. However due to their guaranteed payout amount(s), they work so well especially in uncertain future markets.
- Inflation can affect long-term value if the economy deteriorates along the way and vice versa.
- Some policies have complex terms. Ensure your financial advisor discloses all the terms and conditions to you.
Cash Value Life Insurance vs Term Life Insurance in Kenya
Cash value life insurance and term life insurance mainly differ in purpose, cost and benefit.
Term life insurance provides pure financial protection for a specific period of time, for example a financial protection for 10 years.
It only pays a death benefit to the nominated beneficiaries if the insured dies during that term and does not build savings or cash value.
Premiums are usually lower, making it more affordable.
Cash value life insurance, on the other hand, combines life insurance with long-term savings or investment growth.
Like I said before, part of the premium builds cash value that the policyholder can access later through maturity payouts, withdrawals, or loans.
These policies are usually more expensive because they offer both life cover and savings benefits.
Are Cash Value Life Insurance Policies Worth It in Kenya?
Yes, cash value life insurance is very beneficial. If you do not have one and your income permits, you should consider enrolling in one.
They are suitable for parents saving for education, young professionals building long-term savings, business owners looking to accumulate wealth, and people seeking disciplined financial planning.
They are not suitable for people seeking aggressive investment returns, who do not mind putting their money in high risk investments.
Also, if you are looking for cheap life cover only, cash value life insurance is a bit expensive due to combining life cover and a savings plan.
When buy cash value life insurance:
- Compare insurers for the best savings returns.
- Check returns and bonuses amounts
- Understand surrender terms of the policy.
- Review premium flexibility. Can they be paid monthly, quarterly, semi-annually or yearly.
- Confirm claim settlement reputation of the insurer.
- Look at inflation impact and adjust accordingly.
To understand the common mistakes that people make when buy cash value and life insurance in general such as:
- Choosing unaffordable premiums (over committing)
- Surrendering early
- Ignoring policy terms
- Confusing insurance with high-return investments and forgetting life cover
- Not reviewing coverage regularly
have a look at this article on common mistakes parents make with education insurance policies.
That is all for now, see you in the next.
