It’s funny how a hand full of people still think that life insurance means having a ‘back-up’ or ‘spare’ life in case the ultimate end (death) occurs. Well, wouldn’t it be nice if that is actually what it is about? As much as I would love to say yes, that isn’t what life insurance is really about. So what really is life insurance?
In simple, layman’s English it is a contract between a person (usually called the assured) and an insurance company (usually called the insurer) to pay a specified amount of money to a named beneficiary on the death of the assured. In other words, it means making financial provision for your dependents in case of death. This means, one’s dependents can have a level of financial comfort should the bread winner suddenly die. This is made possible by a simple choice to take up a life insurance policy.
How It Works
In this part of the world, unfortunately, people find it difficult to believe that a company would pay, for instance, three million naira to the beneficiary of a deceased policy holder who only made a single premium payment of fifty thousand naira before their death. Well, as difficult as it is to believe, it is true! An insurance company which has accepted to cover a policy holder in the event of death is liable to pay the sum assured (the agreed sum) should the insured event (in this case, death) occur.
So how is this really possible and how do the companies make profit to sustain them and stay in business? Well, it is simple; one of the ‘strategies’ the makes insurance work is something referred to as the common pool. This concept works with the law of large number where similar risk exposures are filed in a common pool. In a more practical sense, let us say an insurance company undertakes to cover the following risks: fire, theft, burglary etc. These are all various kind of risks and one can classify them as different ‘pools’ where all fire risks are pooled together, all theft risks are pooled together and so on. The idea behind this is that in a particular year, assuming an insurance company underwrites five thousand fire risk policies. Not all five thousand of them would suffer losses; hence the losses of the unfortunate few would be compensated from the premiums paid by the lucky ones who suffered no losses that year.
In another example, a life assurance company underwrites ten thousand life policies in one year; not all ten thousand policy holders would die that year hence, should death occur at all, the unfortunate few would be compensated from the premium contributions of the other fortunate, living policy holders.
This, in a very nut shell, is how insurance works. That is why it is possible for them to pay claims and not be affected by the death of one or two policy holders, no matter the magnitude. This does not mean however, that insurance companies don’t run into trouble with some very heavy claims, time and space would not permit me to go into details about how they handle some difficult situations. The purpose of this article is just to arm you with the foreknowledge of the concept called insurance.
So How Do You Benefit?
From experience, most people feel they cannot take up insurance policies as it only makes financial provision on their death and not while they are alive. This is wrong. One can benefit from life insurance whether or not they are alive and I’ll show you how.
• Term Assurance: This type of insurance, usually very cheap and affordable, provides a huge sum of money on the death of the life assured to his named beneficiaries for a very small amount of premium. For instance, one can secure a sum assured of N500, 000.00 (five hundred thousand naira) with a premium as small as N2,500.00 (two thousand five hundred naira). These are usually yearly contracts (which means, the premium is paid just once a year) and the beneficiaries get nothing if death does not occur within the stipulated period.
• Investment Linked Insurance: These are like term assurances but in this case, the life assured get to take home the sum assured and more at the end of the stipulated period if he survives the term. These types of policies are usually not as cheap as term assurances but the policy holders are entitled to get their savings back and more at the end of the agreed term e.g. five years. This can be viewed this way; if you are saving twenty thousand naira monthly and you intend to do it for five years, it will amount to one million, two hundred thousand. If you have taken an investment linked life assurance policy, your beneficiaries would get one million two hundred thousand should death occur any time during the duration of the policy, even if it is just after the payment of the first premium and if it doesn’t occur at all, then at maturity, you get one million, two hundred thousand plus interests.
The benefits of insurance are numerous and with a proper understanding of the subject one can make the most of it. So the next time you come across that insurance sales man, don’t get mad; call him and have a long chat with him!