How policy holders can enjoy benefits of life insurance cover

Last week, I had an opportunity to listen to an insurance sales agent give a presentation on a life insurance cover product to members of an investment club gathered for an annual meeting.

While his presentation was well done, many of the members in attendance snubbed the idea of buying a life insurance cover, describing it as devoid of any tangible benefits for the insured while alive because benefits are accessible upon death.

This is a misconception which has discouraged many households from securing a life cover, while others have cancelled their ongoing covers to cash in the benefits while they are still alive at the expense of protecting their dependants.

There are many benefits that a life policyholder can enjoy when still alive and still keep the policy running.

Today, many insurance companies have rolled out flexible insurance covers with adjusted features where the policyholder pays regular premiums until a specified age, say 65 years, beyond which they stop paying and enjoy the cover until their death when the benefits are paid to beneficiaries.

The benefit of this policy is that it saves policyholders from the burden of paying premiums in their sunset years while ensuring their dependants benefits.

However, this provision comes with higher premiums as the rates increase progressively.

In the conventional life policies where the policyholder pays premiums until death, the payment is constant and never changes until death. This makes the budgeting process easier.

Comparatively, in retirement schemes the benefits paid out before retirement age are subject to punitive taxation rates compared to those applicable to benefits paid at retirement.

But in life assurance, the beneficiaries receive death benefits no matter when the insured dies as long as premiums were paid.

In addition, any investment income earned on the premiums paid within a life insurance cover is tax-deferred. This means you do not have to pay tax as the cash value of your whole life policy increases.

Overtime, when an emergency strikes and you are in dire need of cash, you can opt to borrow from your insurance company against your life policy without facing income tax on the loan.

Most insurance companies are ready to provide loans equivalent to the cash value built over time, or less, but they cannot give a loan amount that exceeds the insured’s cash value.

Note that you will not be borrowing your own money but funds from the insurance company on which you are charged an interest.

Utilised

This interest rate is often relatively lower than commercial banks’ lending rates. The good news is that your policy will continue to run as long as you continue to pay premiums and service your loan.

If not carefully utilised, the loan can have dire consequences on your policy. In case of death before repayment, the insurance company will deduct the loan plus the interest charged from the benefits before passing the surplus to beneficiaries.

Conversely, if you fail to repay your loan the insurance company will recover the money from your savings, including interest rates.

Remember that any time you cancel your life policy, you are only entitled to a surrender value limited to a portion of your cash value and not the entire benefits.

You can choose to use your cash value as collateral when applying for a loan facility from a commercial bank. This depends on the arrangement that your insurance company makes with the bank.

On top of the benefits, a life cover also comes with some riders such as disability benefits. This is an optional policy taken with the cover at a small fee.

It exempts the insured from paying premiums in case of disability. This saves the policy from any lapse that would result from nonpayment of premiums caused by disability.

Today, many insurance companies have also rolled out various products of life policies. They guarantee bonuses at specific periods in the course of the policy as well as at the end of the policy.

As a policyholder, these benefits will accrue to you while you are still alive and will not solely benefit your dependants.

Mr Opiyo is a training manager & coach with Tolerance Employee Financial Advisors Limited. Can be reached through: [email protected]