NAMIBIA: LIFE INSURANCE, RIP-OFF OR PAY-OFF?

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Namibia: Life Insurance, Rip-Off Or Pay-Off?

The Namibian (Windhoek)




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The Namibian (Windhoek)

COLUMN
30 June 2008
Posted to the web 30 June 2008

Windhoek

Seeing the value in life insurance is often, as is the case with many intangible goods, somewhat difficult at first glance.

For example, life insurance that pays out when the insured life dies. Many people believe they will never get anything back in return for their premiums. A closer look, however, quickly shows that this is not true.

NOTE: STUDY OF LIFE INSURANCE IS HIGHLY RECOMMENDED.

In qualifying this statement, it is important to take into account that life cover generally takes on one of two forms - the one form is term insurance which will only pay out the contracted life cover should the person whose life is insured die within the agreed time period for which the cover is taken out.

The other form is whole life insurance which pays out the contracted life cover at whatever point in time the life insured dies.

It is thus clear that if a whole life policy is maintained, at some future time there will be a payoff.

The premium payable for term cover is less than for whole life cover, all other things being equal.

Whether you select a term insurance option or a whole life insurance option should be determined by the need you are attempting to address - if life cover is only needed for a very specific period of time (e.g. for bond cover where it is known in what period the bond will be repaid and there is no additional need for life cover after repayment of the bond) term cover might suffice, but as a general rule it is better and wiser to take out whole life cover.

NOTE: IT IS ALSO IMPORTANT TO LISTEN TO STORIES OF THOSE WHO GOT INSURANCE.

A short example to illustrate the value of taking out whole life insurance is outlined below: Joe is a 35 year old male accountant with a wife and two children.

Joe's financial adviser has done a capital needs analysis for him, from which it is evident that Joe's dependants would require N$1 million capital to replace the loss of income his family would suffer should he die today.

A quotation for N$1 million whole life cover on Joe's life with a level premium shows that Joe would have to pay N$ 261,00 per month for the required cover.

Joe is interested in knowing if, should he decide not to take out the life cover and instead invest the premium he would have paid towards the life cover, what returns he would need to get on his investment to be in the same position.

This situation is outlined in the following table: Monthly Return needed Dies at Age Premium to equal Paid life cover 40 (5 years on) 261,00 123,62% 45 (10 years on) 261,00 51,8% 55 (20 years on) 261,00 21,26% 65 (30 years on) 261,00 12,37% 75 (40 years on) 261,00 8,3% It is therefore clear that even if the life cover is looked at as an investment that will last for Joe's expected lifetime, it still delivers a competitive return. Whilst the return generated by life insurance is one important aspect when considering the value for money of life insurance, there is also another very important aspect to consider - the fact that nobody is exactly sure when he/she is going to die.
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This is where life cover really offers a cost effective solution to create the capital needed by the life insured's dependants. If, in our example, Joe should die in a car accident three months after having taken out his life insurance, he would receive N$1 million in return for total premiums paid of N$783,00 - a very sound investment indeed! A different way of looking at this is to say that Old Mutual in return for N$261,00 per month carries the risk of Joe dying prematurely, instead of Joe's family having to carry that risk.

NOTE: LIFE INSURANCE IS INDEED A WISE INVESTMENT SPECIALLY THOSE WITH DEPENDENTS.

From what we have highlighted above it is obvious that to extract maximum value from your insurance portfolio, your portfolio needs to be based on a proper analysis of your needs.

These needs must be reviewed regularly. For further information and advice tailored to suit your unique needs, please call your Old Mutual Namibia financial adviser or broker -This article was contributed by Mathys du Preez (Manager: Retail Advice) Centre - Old Mutual Namibia


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