Since you are here, it is with certainty that you know something about endowment policies. It is also clear that you need some clarification about them before you enroll in one.
The information that is available everywhere about endowment policies in Kenya simply define them as “savings accounts with free life insurance”. Yes, they are savings accounts with life protection, but not free as touted by the marketers. There is still more that is not said about these policies.
An endowment policy in Kenya is a legally binding multi-year financial contract governed by local regulatory frameworks.
Since I am in the middle of the insurance market, I will break down the exact math, penalties, and hidden clauses that we financial advisors or agents rarely explain to our clients. Let us do this.
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The Mechanics of an Endowment Policy in Kenya: Where Does Your Premium Go?
When you enroll in an endowment policy, you are required to make a premium contribution regularly e.g. monthly, quarterly, semi-annually, or yearly. The regular premium you contribute is determined by the maturity payout (sum assured) you have chosen.
The biggest part of the premium you contribute goes to your savings plan while the other small portion goes to protection of your life guaranteeing your financial goal regardless of the turn your life takes.
Life protection in endowment policies is usually against death and/or permanent disability and critical illness. Life protection just takes a small portion of your premium contributions. It is meant to guarantee your long-term financial goals such as educating your children whether you are there or not, whether you are critically ill or not, or whether you are permanently disabled or not. Your long-term quest to give your children a good education is locked.
The biggest portion of your premiums goes to building a fund. This fund is now the one that goes to fulfill your financial goal such as building a house for your family, paying future school fees for your children, or retiring in financial freedom.
In an endowment policy, you must make your regular contributions as scheduled. If you have a stable income or you are above financial dependency, an endowment policy should be one of your ultimate vehicles of building untaxable wealth. These policies instill a savings discipline through forced savings. To ensure that you pay your premiums on time, it is wise to place a bank standing order, use M-pesa ratiba, or do it though a salary check-off.
The aspect of guaranteeing your financial dreams, forced savings, and the savings returns that arise from endowment policies is what makes them superior to Money Market Fund (Unit Trust) and Sacco savings.
When I talk to endowment policies prospects, most people are just concerned with the savings returns. It is good to do this, but do not forget the power of disciplined saving culture they instill in you and life protection that make your financial goals guaranteed that otherwise you would have missed.
Maximizing KRA Tax Relief on Your Endowment Policy in Kenya
Besides the benefits of instilling a saving discipline in you, guaranteeing your financial goal, and untaxable savings returns, you will enjoy a tax relief of 15% of the premiums you make regularly.
Under Section 15 of the Income Tax Act (Cap 470), holding an eligible endowment policy in Kenya qualifies you for a 15% premium tax relief.
What does this mean? It means that if you contribute KES 30,000 per month as your regular premium, you will get a tax relief of KES 15%(KES 30,000). That is KES 4,500 of your income that will not be subjected to tax. Your tax burden is lowered by KES 4,500.
This tax relief is capped at KES 5,000 per month or KES 60,000 per year. For example, If your monthly premium is KES 200,000, your tax relief should be 15%(200,000) = KES 30,000 per month. Since the maximum tax relief you can enjoy per month is capped at KES 5,000, your tax relief will be lowered back to the maximum limit of KES 5,000.
The Liquidity Reality: Surrendering an Endowment Policy in Kenya Early
I know this is a hot topic. There is a hot friction here, but once you understand it, you will just fill the onboarding form above.
Unlike investment plans where returns are not guaranteed and no life protection, endowment policies guarantee the amount you will receive at the end of the savings period or on occurrence of the covered unfortunate event such as death, disability, or critical illness even if the market conditions are not ideal.
The maturity payout includes your contributions and savings returns. To generate these benefits, your money is locked and is available at stipulated timelines within the policy term or at maturity depending on the type of your endowment.
If you try to access your money before the defined timelines, you will access it through what we call cash surrender value.
If you access your money through a cash surrender value you will be penalised. The penalty will be determined by the age of your policy. In general, if you withdraw your money before the scheduled time you will get up to 95% of your savings.
Cash surrender value is available to you if your policy is 2 or 3 years old. That is the standard in Kenya.
To avoid a penalty, the best way is to write to your insurer through your financial advisor requesting that your policy be put in a paid-up state.
A paid-option is whereby you stop contributing to your life insurance savings plan and let the money already with the insurer stay with them until the maturity period. This way, the insurer will calculate a new sum assured that includes your contributions and some proportionate savings returns.
Cash surrender value or a paid-up state are sought, especially when your income shrinks or you are facing hard economic times.
Another alternative when your policy has achieved a cash surrender value, is to take a policy loan. The policy loan amount you qualify for is based on your cash surrender value and your cash surrender value is determined by the age of your policy (the number of years you have contributed). For insurers that have embraced going digital, like Britam, you will apply for a policy loan from your app. Your advisor will guide you accordingly.
What if you face hard financial times when your policy is below 2 or 3 years? You can pause for less than six months and then some back by paying the arrears due. If it is above 6 months and you want to come by paying the arrears, you may be subjected to a medical checkup depending on your age.
Alternatively, you can request a policy re-dating and you start afresh. The money you had earlier contributed becomes part of this re-dated policy.
Choosing the Right Structure: “With Profits” vs. “Anticipated” Plans
There are several types of endowment policies. The main ones are two, endowment with profits and anticipated endowments.
The one you choose depends on your financial goals.
Endowment policies with profits pay a lump sum at the end of the maturity period that includes your contributions and savings returns or bonuses. If you have a long-term financial goal like building your family a house, buying land, saving for retirement, this should be your plan.
You will get a lump sum that is adequate to cover such financial lump sum that require huge chunks of money.
The other type is the anticipated endowment policy. These policies pay structured survival benefits or bonuses within the policy term e.g. after every 4 years and a final maturity payout that is bigger than the bonuses.
The survival benefits or bonuses are usually defined in percentage of sum assured e.g. 20% of sum assured (maturity payout).
Anticipated endowment policies will fit you if you have a financial goal that requires it to be worked on in phases such as an education plan where you need money to clear school fees and related costs at various levels. They are structured in such a way that such bonuses coincide with the critical levels that need substantial school fees.
A table comparing the endowment policy with profits and anticipated endowment policy in Kenya
| Endowment Policy | Ordinary Endowment (With Profits) | Anticipated Endowment Policy |
| Payout Style | Single lump sum at the end of the term | Regular cash drops every 4 or 5 years + maturity payout |
| Best for | Long-term milestone targets (House, Land, Retirement) | Periodic capital needs (School Fees, Business, Maintenance) |
What Happens If You Can No Longer Pay Your Premiums?
I think I jumped the gun here. I have already alternatives available to you above if you can no longer pay your premiums.
- Automatic Premium Policy Loan. You can apply for a policy loan and use it to take you back on track. Your policy must be 2-3 years to qualify for a policy loan.
- Reduced Paid-Up Status. If your policy has attained a cash surrender value, you can write to the underwriter and inform them if converting your policy to paid-up state. You can also just stop paying and after the grace period and some months in arrears, your policy will automatically go to paid-up state.
- Re-dating Option. If your policy has not achieved a cash surrender value state, usually below 2-3 years, you can write to the underwriter requesting a time out. Once you are back, the policy is just re-dated and your previous contributions will be part of this new beginning. Please note that arrears below 6 months can be paid and your policy will run as usual. If the arrears are over six months and you want to resume contributing, you may be required to go for a medical checkup to avoid a bad play.
Is an Endowment Policy in Kenya Safe? (Regulatory Protections)
The insurance market is regulated by a number of statutory bodies.
One of them is the Insurance Regulatory Authority. Some of its mandates are to monitor underwriter capital requirements and solve disputes between the insurer and policyholder.
The IRA regulates the behaviour of insurance companies and in case you have a dispute with an insurance company, you report the dispute to them.
There is another institution called the Policyholders Compensation Fund (PCF) that acts a safety net in case an insurance company falls under. Its work is to compensate policyholders. It protects claims up to the statutory limit of KES 250,000 if an insurer undergoes liquidation.
There other methods of solving insurance disputes including litigation and arbitration.
When you are enrolling in an endowment policy, ensure that the insurance company is you chose is financially healthy and is known to pay claims.
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If your are interested about signing up for an endowment policy in Kenya? Please fill the quote form above and I will get to you in no time.
