We, Kenyans, are shifting toward personal financial planning rather than relying solely on NSSF or social safety nets like “chamas” simply because we are now more informed and there are better alternatives, life insurance being a superior alternative.
Life insurance policies are superior because they offer cash value (money) and protection, helping you reach your dual goal of achieving your money dreams and at the same time protecting your family from financial ruin due to unforeseen events, whether you are there or not.
In Kenya, there is a misconception that runs around. That all life insurance only pays out when you die. Wrong.
This is not true and that is why, today, I will take you through types of insurance policies in Kenya.
I will take you through the main categories of life insurance in Kenya to help you identify the right vehicle for your financial goals.
Spoiler: If you are in a hurry, I will briefly list them here so that you can simply jump to the one you are really interested in.
The most common type of life insurance policies in Kenya include:
- Endowment insurance policies
- Education insurance policies
- Investment-linked (unit-linked) life insurance policies
- Whole life insurance policies
- Pure/Term Life Insurance
- Last Expense/Funeral Insurance Policies
The first 4 are cash value life insurance including whole life, endowment, and many investment-linked plans has mainly the following components:
- Cash value or savings
- Death benefit
- May pay out at maturity
- Usually cost much more
- Often sold as a way to save and protect simultaneously.
The last 2, pure life insurance and last expense have the following characteristics:
- Pays only if you die during the policy term
- No savings component
- No maturity benefit
- Much cheaper
- Highest death cover per shilling paid
With that quick information, you can jump to the one that really captures your interest.
Types Of Life Insurance Policies In Kenya
Endowment Policies
Endowment policies also combine insurance life protection with cash value that build over the term (saving period) selected. A good example of an endowment plan is education life insurance policies.
Endowment policies pay survival or/and maturity benefits at specified dates or upon the occurrence of unforeseen events covered in the policies such death or disability during the policy term.
How Endowment Policies Work
When you enroll in an endowment policy, for example of a 10-years endowment policy:
- if you survive till the end of the policy term, you get a maturity payout. Some policies have in between payouts called the survival benefits paid regularly after every defined number of years.
- If an unfortunate event covered in the policy occurs before the maturity, such as death, your beneficiaries receive the death benefit.
Advantages of Endowment Policies
- Endowment policies offer guaranteed maturity benefits.
- Encourages disciplined savings, helping you achieve your financial goals.
- Provides life cover during the term, guaranteeing your future financial goals and protecting your family
Shortcomings of Endowment Policies
- Higher premiums than term insurance since your premium covers two components, life protection and building cash value
- Returns may not always keep pace with inflation, similar to investments.
- Less flexible than other investments.
Endowment policies are used for saving toward a specific future date while maintaining life cover.
Education Insurance Policies
Education insurance policies are endowment policies designed for education saving.
I have decided to list them here due to the important role they play in our society of ensuring our children go to school whether we are there or not.
How Education Policies Work
You start an education policy if you have kids or you are planning to have kids, and you want to guarantee their future education whether you are there or not.
An education policy combines a savings plan and life protection.
When you enroll in an education policy, you start making regular premium contributions to your plan.
Part of the contributions you make go to savings while another portion goes to securing your life against unforeseen, unfortunate events that can shatter your dream of educating your children in the future.
The savings plan in education policies is quite generous and is designed to yield savings returns enough to cover inflation so that your money does not lose value during the savings period.
The life protection in education plan covers your life against unfortunate events such as death or permanent disability due to sickness or accident.
If the policyholder dies or becomes permanently disabled before the end of the policy term, the regular premium contributions are waived from time that unforeseen happens and the guaranteed maturity payout is paid to the beneficiary when due to ensure your children attend school as you had planned.
Education policies also allow you to add life protection such that in the event of death or permanent disability an immediate payout is made to you or your family to cater for school fees and living expenses as they wait for the final payout.
The amount you add to the normal premiums that you pay regularly due to this optional life protection is negligible, a fraction of your premium.
Advantages of Education Policies
- Guarantees the future education of your children, whether there or not through life protection
- Savings returns are generous factor out inflation during the savings period
- Eliminates dependency in case of occurrence of unfortunate events in policyholder’s life.
- Gives you peace of mind and security
- Maturity payout and bonuses are not taxable
- You will enjoy a tax relief if your policy run for 10 years or more
- Instills a savings discipline
Disadvantages of Education Policies
- They are a long-term savings commitment
- You must be financially stable as you have to make your contributions without failure. You can only opt out after the 2nd or 3rd year of your policy term.
- Might be unfordable to low income earners due to the cut-off premium amounts
If you are looking to guarantee the future education of your children by creating an education fund, education policies are a good way to do so.
Investment-Linked Life Insurance (Unit-Linked Plans)
Investment-linked or what we simply call unit-linked life insurance combine life insurance with investment in market-based funds.
How Unit-linked Life Insurance Works
- Part of the regular premium contributions pays for insurance protection.
- Part is invested in selected funds such as equities, balanced funds, or money market funds.
- The value depends on investment performance, so no guarantees like in the endowment policies.
Benefits Of Unit-linked Life insurance
- Potentially higher returns when the economy is doing well.
- Flexibility to choose investment funds (sometimes).
- Life cover and investment in one product.
- Greater transparency on fund performance.
Shortcomings Of Unit-linked Life Insurance
- Investment risk is borne by the policyholder.
- Returns are not guaranteed.
- Management and policy charges can reduce returns.
- Fund values can decline during market downturns.
Unit-linked life insurance importance is to combine life cover with long-term wealth accumulation and a willingness to accept investment risk.
Whole Life Insurance
This type of cash value insurance offers a lifetime life insurance cover as long as the premiums are paid.
How Whole Life Insurance Works
When you enroll in whole life insurance, the regular premium contributions you make:
- A portion of your premium pays for insurance life protection.
- Another portion builds a cash value.
- The cash value grows over time and may be accessible through policy loans or withdrawals, and the accessibility of cash value depends on the insurer.
In whole life insurance, you can decide to make the regular premium contributions over a particular term period specified in the policy and upon the end of that term you have chosen, you stop paying the regular contributions, but the coverage continues your entire Lifetime.
Advantages of Whole Life Insurance
- Lifetime coverage.
- Builds cash value and sometimes ensurers give a specific return rate.
- Can be used for estate planning and inheritance.
- Premiums are usually fixed.
Shortcomings of Whole Life Insurance Policy
- It is usually more expensive than term life insurance because of the cash value component.
- Returns on cash value may be relatively modest, usually due to the guarantees
- Surrendering the policy early can result in penalties.
The importance of whole life insurance is lifetime protection and wealth transfer to heirs.
Pure Life Insurance (Term Life)
Pure life insurance is also referred to as the term life insurance or term assurance.
It is the simplest form of life insurance and it is designed to provide financial payout to your beneficiaries if the policyholder dies within a specified period (term) of the policy.
How it works in pure life insurance.
- You choose a sum assured, the amount of money you want to be paid out to the beneficiaries when you die.
- You choose a term, for example 5, 10, 20, or 30 years.
- You pay regular premiums, usually monthly, quarterly, or annually).
- If you die during the policy term, the insurer (insurance company) pays the sum assured to your beneficiaries.
- If you survive until the end of the term, the policy expires and typically no benefit is paid to you or your beneficiaries.
Allow me to give you an example. Let’s say you have enrolled in a pure/term life insurance with a policy term of 20 years and the sum assured is KES 25,000,000.
During the 20-year policy term, you will be making regular contributions either monthly, quarterly, semi-annually or yearly.
If you die with the 20-year policy term, KES 25,000,000 is paid to the beneficiaries.
If you survive until the 20-year policy term comes to an end, neither you nor your beneficiary receives a payout and the cover terminates.
Pure/term life insurance has some advantages and shortcomings.
Advantages of Pure Life Insurance
- Pure life insurance has lower premiums compared to cash value, whole-life or investment-linked policies.
- High coverage amounts (payouts) for relatively low cost.
- Ideal for protecting a family against loss of income if the breadwinner dies e.g. parent.
- Can help cover mortgages, school fees, loans, and living expenses if the insured dies.
Shortcomings of Term Life Insurance
- Pure life insurance has no built-in maturity benefit.
- Coverage ends when the term expires.
- No cash value accumulation
Given its advantages and shortcomings, should you consider it or not?
Pure life insurance is suitable for you if you are a:
- Parent with young children.
- Breadwinner supporting a family.
- Person with mortgages or significant loans.
- Business owner who want to protect partners or dependents.
Last Expense/Funeral Insurance Policies
Last expense policies are designed to cover funeral expenses of the policyholder in case they pass away during the cover period.
Last expense covers come in many formats depending on whether it is an individual, family or group (chamas/corporate) being covered.
I see a lot of Kenyans struggling with funeral expenses, trying to raise money from their relatives, friends and well wishers when their loved ones pass away.
Unless in special circumstances, those spontaneous harambees and unplanned debt for the family should not happen.
Whether you take a cover as an individual, a family, or a group, the last expense costs just a small amount.
Claims are paid within the mourning period.
How Last Expense Policies Work
You can enroll in last expense cover as an individual, family or a group in the form of a chamaa, SME, or corporate.
Once in, you shall be paying an annual premium. The annual premium is so small as compared to the cover you get. For an individual, a last expense cover of KES 500,000 might just cost an annual premium around KES 3,000.
If the policyholder or member of a scheme dies, this amount is paid to their family to cover funeral expenses.
The premium is renewed annually if you want to stay on cover.
Disadvantages of last expense policies
- Eliminates external financial dependency for funeral expenses in case a member passes away.
- Given the cover one gets, the annual premium they pay is significantly low.
- Group schemes reduce the premiums even further.
- It allows you to join like a group for affordability.
Shortcomings of last expense policies
- I don’t know of one, apart from the one that uninformed people might think you have become so arrogant such that you do not ask for their financial help during the wake period.
From here, I am certain you have a clear decision on the type of life insurance that meets your financial needs and goals.
To keep this article neat and clear, in my next articles, I shall cover:
- Best Endowment Policies in Kenya
- Best Education Insurance Policies in Kenya
- Best Term Life Insurance in Kenya
- Best Whole Life Insurance in Kenya
- Best Investment-Linked Life Insurance in Kenya
- Best Family Protection Policies in Kenya
For any question or comment, reach out to me via the provided phone number or put your inquiry in the comments section.
See you in our next engagement.
