As I interact with my clients there is a question I get all the time, “should I take an endowment policy or term life insurance?”. I usually do not struggle to answer this question since I quickly pose another question to them, “are you looking for a savings plan with life protection or pure life protection with no savings in it?
Their answer simplifies their dilemma. It will also simplify your dilemma when choosing between endowment policy and term life insurance. Are you looking for a plan with a savings plan and life protection or pure life protection to cover your dependents if the unexpected happens?
If your answer is a savings plan with life protection to cover your dependents, you need an endowment policy. If your preference is pure life protection, your pick should be term life insurance.
However, the answer is not that simple as I have put it. You also deserve to know what each plan entails to make an informed choice for yourself.
Many Kenyans due to lack of qualified financial advice pay for insurance policies without knowing whether they are buying a savings plan or pure risk protection.
In this write up, I will take you through the code differences and similarities between endowment policies and terms life insurance policies. This will help you evaluate which policy aligns with their financial stage.
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What is an Endowment Plan in Kenya?
An endowment policy is a dual life insurance that combines a savings plan with life protection to cover dependents. They come in defined policy terms e.g. 10 years, 20 years, and so on.
Endowment policies foundation is to solve the 3 challenges of life that we face in our lives: building a house, educating our children, and retiring or spending our old age in financial freedom.
Simply, the purpose of an endowment policy is to help you build a fund to meet your long-term financial goals or milestones. They pay a guaranteed maturity benefit and some might include survival benefits along the policy term such as money back and education insurance policies.
They go ahead to guarantee these goals by including built-in life protection such that these goals are achieved whether you are there or not.
How? The most basic life protection of an endowment policy is a death cover. In case the policyholder dies within the policy term, the maturity payout is paid to the nominated beneficiary when due. Again , when the policyholder dies, future premiums are waived, meaning that after the death of the policyholder, the beneficiaries are not expected to pay the remaining premiums.
Endowment policies are also flexible enough to allow the insured to add optional life protection such as disability and critical illness covers, such that if any of these events happen, the policyholder is paid a lump sum immediately to look after their families as they wait for the maturity payout.
You can read more about endowment policies here. I have also compiled a list of the best endowment policies in Kenya.
What is Term Life Insurance in Kenya?
As opposed to endowment policies, term life insurance just offers pure life protection with no maturity benefit/payout.
Term life insurance comes in the form of defined policy term e.g. 5 years, 10, years, and so on, as opposed to whole life insurance which is permanent.
I have extensively discussed whole life vs term life insurance in this article here.
The basis Term life policies life protection is death cover. This means that if the insured dies within the policy term , their nominated beneficiary is paid sum assured. If the policyholder outlives the policy term, nothing is paid and the policy terminates.
However, the insured can add more life protection as an option such as critical and disability covers such that in the unfortunate events of permanent disability or critical illness, the policyholder gets a payout to look after their families.
Because of the nature of term insurance, it is usually way cheaper than endowment policies since it does not build cash value. All the premium you contribute goes to your life protection.
Term life insurance is ideal for debt protection e.g.covering a mortgage or personal loan, and dependent support.
You can read more about term life insurance in this article here.
Head-to-Head Comparison: Endowment Policy vs Term Life Insurance
| Feature | Endowment Policy | Term Life Insurance |
| Primary Goal | An endowment policy is for wealth accumulation and financial protection. | Offers pure financial protection for dependents. Term life insurance has no savings plan or maturity payout. |
| Premium Cost | They charge higher premiums since they combine a savings plan with life protection. | Very affordable since all the premium goes to life protection with build cash value. |
| Maturity Benefit | They feature a guaranteed lump sum at maturity and accrued bonuses. | No maturity payout, unless a return-of-premium rider is attached which is very rare. |
| Cash Value/Loan Access | Accumulates cash surrender value that is the basis for policy loans | No surrender value or policy loans since term life policies do not build a cash value/fund |
| Best For | Disciplined long-term goal savings for long-term financial goals such as school fees, buying a house and retiring in financial freedom. | They are suitable to young parents, those with low budgets, and for mortgage protection |
Kenyan Market Nuances and Benefits
- KRA Insurance Tax Relief
If your life insurance policy is 10 years and above, you are eligible for a 15% tax relief of the regular premiums you pay towards your policy.
Under the Income Tax Act (Cap 470), policyholders in Kenya qualify for a 15% tax relief on life insurance premiums, capped at KES 5,000 per month ( or KES 60,000 per year).
This applies to both qualifying term and endowment policies.
- Riders & Add-Ons Available in Kenya
In life insurance, you can add more optional covers known as riders. They include critical Illness cover (heart attack, stroke, cancer), and Permanent Total Disability (PTD) and Accidental Death Benefit.
When these unfortunate events occur to the policyholder, beside an immediate payout and the final maturity payout, future premiuns are waived to remove the financal burden from the policyholder and their family.
Pros and Cons Breakdown Of Endowment and Term Life Insurance
Term Life
- Pros: Term life insurance is highly affordable, allowing you to secure a huge coverage at a very low premium. Again, it is straight forward.
- Cons: Term life has no return on investment if you outlive the policy term. There is no maturity payout, if you outlive the policy term it expires and you go home with nothing. If you renew at an older age, premiums will increase.
Endowment Policy:
- Pros: Endowment policy cultivates a savings discipline. It reinforces a savings mechanism. Another gokd thing about endowment plans is that the maturity payout is guaranteed payout with life protection in the mix. You can also use these policies to take a policy loan or use them as security for loans.
- Cons: Those who intend to join endowment policies must have some steady stream of income. You must contribute your premiums as agreed. You cannot exit an endowment policy before 2 years or 3 years in some policies even in the face of financial difficulty. You can only ask to be released until your are financial stable again (re-dating). After 2 or 3 years you can exit through cash surrender value or a paid-up option. You can understand this more by reading an article I did about Britam Akiba Savings Plan.
Which One Should You Choose?
- Choose term insurance if your are on a tight monthly budget, especially for sole providers with a young family. Term life insurance is very affordable while giving your family a high coverage.
- Choose an endowment policy if you struggle with saving discipline and want a guaranteed lump sum in the future (5 to 30 years) to pay high school fees, but a house, live in financal freedom in retirement, or fund a specific project.
Frequently Asked Questions (FAQs)
- Can I surrender my endowment policy if I get into financial distress?
Yes you can, but only if the policy is 2 or 3 years old depending on your endowment policy. You can also let the money sit with the insurer and collect it at maturity (paid-up option). The paid-up option ensures you do not get penalized for opting out early.
- What happens if I outlive my term life policy?
If you outlive your term insurance policy, it expires and nothing is paid to you. Term life insurance only pay is the insured dies. It can also pay upon permanent disability or critical illness if the policyholder had added the riders to their policy
