In very simple terms, Insurance is a contract between the customer (insured or assured) and the insurance company (insurer) such that the insurer agrees to pay compensation to the insured should he suffer financial losses as a result of certain events covered under the contract in return for a consideration (premium).
Insurance could be classified as either short or long term depending on the tenure of the contract. Short term insurances are contracts that are renewed yearly while long term insurances are contracts that take longer time to mature say five years or more.
Insurance is broadly classified under life and non-life depending on what is covered under the contract. It is life when it is based on the life of the policyholder or another person (life assured) but when it is not based on the life of a person, it is non-life insurance. Life insurances are normally long term insurances.
Life insurance is needed by anybody who is desirous of providing for his loved ones when he dies or is unable to earn income as a result of the above causes. When one buys a life insurance policy, he seeks to protect his income to be able to provide for those who depend on it or to cover general living expenses should his income ceases as a result of death, sickness or redundancy.
Classes of life assurance include term assurance, whole life assurance and endowment mainly but there are income protection plans, accident, critical illness insurance, sickness and unemployment protection plans too. The choice depends on age, dependants, income and financial liabilities, among other things.
Term assurance
This provides cover for a fixed term with the sum assured payable only on death within this period. There are no investment benefits or payments on survival. This is unfortunately, where many policyholders get it wrong; they expect that since they have bought insurance, they should get something at the expiration of the policy the period. There are variants of this.
Whole life assurance
This protects policyholders throughout the duration of his life, no matter how long he lives. Unlike term assurance benefits are paid if the life assured dies during the term of the policy or if he outlives it.
This policy will eventually pay no matter how long since there is no time limit to the protection; dependants of the life assured just have to wait patiently till he dies to get the benefits of the policy. It guarantees lump sum payment when the policyholder dies and it has “surrender value” should the policy be cancelled midway. There are variants of this too.
Endowment insurance
Endowment policies are equivalent to saving schemes but the difference is they have life assurance cover in addition. They combine the benefits of a savings scheme with the peace of mind offer by a life assurance policy. It pays outstanding debts including mortgages should the policyholder die before repaying the loan in full but if he outlives the policy he receives a lump sum payment.
Premium default
Sometimes policyholders default in paying premiums as agreed under the contract and may ask to take back whatever accumulated premium they have paid. For reasons, including mis-selling, under-performing policies and inability to pay the premium and even ignorance among other things; policyholders may develop “cognitive dissonance” (post purchase doubts), feeling that they made a mistake buying the policies in the first place; so they stop paying premiums.
Inability to pay
Many policyholders go for a huge sum assured because they want the best for their families and loved ones who the policies are meant to protect in case of eventualities, failing to realise how stressful it could be paying premiums from their salaries and wages. Policyholders could as well lose their jobs or suffer business failures making it very difficult for them to meet their premium obligations to the insurer. These could lead to default in premium payment.
Stuck with wrong Products/mis-selling
The insurance industry in Nigeria is suffering from image crisis and apathy flowing from the activities of Agents who live on commissions. Insurers still engage unqualified and uninterested job seekers without giving them adequate trainings before sending them out into the field. One of the sins of Agents is mis-selling as a result of ignorance or desperation to sell and earn commission.
Many people who needed income protection plans unfortunately end up buying term assurances because their Agents did not explain to them the differences in the product offerings. The policyholders eventually get frustrated.
Under-performing policies
Some policies may be under-performing and unable to meet policyholder’s expectations in terms of bonuses and interests. The future value of life insurance products is affected by fluctuations in the rates of interest and inflation and cost of living index. Where these rates erode the value in view, the product under-performs and frustrates policyholders.
Also, some people buy life insurance to reduce taxes but when tax policies change and frustrate their goals, the policy is seen to be under-performing and premium payment may not be a priority any longer.
When life policies lapse
A life insured is expected to pay premiums monthly, quarterly, half-yearly or annually. If the premium is not paid within one month of the due date the policy lapses. The insurer gives a notice to the policyholder stating that the policy is about to be terminated due to the non-payment of premiums within the specified timeframe and the grace period for reviving it.
But when for whatever reasons the policy lapses, the policyholder does not necessarily have to give up because depending on the conditions laid out in the policy document, a lapsed policy could be revived within 5 years from the date of the last premium paid by paying the outstanding premiums with interest.
If revived within 6 months, it could be reinstated without fresh medical examinations. Where the policy has been in force continuously for over 3 years, it gets a paid up value but there is no surrender and paid up values for policies that have not been in force for the minimum period stated in the policy document.
'Paid up' policy
Stuck with a lapsed policy, the policyholder could convert it to “Paid Up” policy. In this case, the sum assured of the policy is reduced to a proportion of premiums paid till date by the policyholder and number of times premiums have been paid. In a paid-up policy, a diminished sum assured is paid
on death or on maturity.
This option benefits older people and those who may not be in a position to pay further premiums because they can continue to be insured under the same product for the same premium till the policy matures. It also helps to reduce premium outflow and keeps life policies alive as against surrendering it.
Speaking on this option, an expert who pleaded anonymity said “after the policy tenure is over, the insured gets a diminished maturity amount plus bonus for the number of years premiums were paid and loyalty additions.”
However before going for this option, the policyholder should review the policy to see whether policy administration, mortality and fund management and other charges will continue to apply after making the policy paid-up. If yes, then he needs another option because these would eventually erode the value of the policy significantly.
Surrender value
Another option for holders of lapsed policies is to go for the Cash Surrender Value (CSR). The cash surrender value is the amount a life insurer pays a policy or annuity holder who voluntarily terminates the policy before it matures or the insured event occurs.
Surrender value is the worth of a life insurance product after charges and fees, if the contract is terminated early with value remaining. It is different from the cash value, which is calculated before any fees are taken upon surrender. The difference is in the surrender charges, which can be significant at times.
Surrender charges drop over time and while always significant they may not impact the surrender value substantially in later years. These usually apply during the first 10-15 years of the policy and when this stops the cash value and surrender value will be the same.
A policyholder is eligible for guaranteed surrender value if he has paid premium for at least three years. Traditionally, the surrender value of a life policy is 30 per cent in the second and third years and 70 per cent in the fourth year, excluding the first year premium.
Making a choice
Many policyholders, who fail to revive their policies back out or surrender it out of ignorance only to regret their actions when they come to terms with the cost of their actions.
So it is important to note that if a policyholder stops paying premium after a specified period, his policy will continue but with lower sum assured. This reduced sum assured is called paid-up value or paid-up sum assured.
Also, if a policy is surrendered, the life cover stops unlike when the policy is paid-up. So, before surrendering that life policy, review what you stand to gain if you make it paid-up and keep it active till maturity.
Surrendering an endowment policy makes sense only if the surrender value when reinvested would generate a better return than the policy would at maturity.
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