Why You Should Get Life Insurance

stevekahome / February 4, 2025 / 0 Comments

Life insurance in Kenya remains vastly misunderstood, with a penetration rate of only 1.3%. This alarming statistic reflects how little it’s embraced, partly due to widespread myths and misconceptions.

For many, life insurance is seen as a scam, an unnecessary luxury meant only for the wealthy, or something relevant only to the elderly. These beliefs have prevented countless individuals from exploring life insurance’s real benefits in providing financial security and peace of mind.

In this post, I’ll tackle the most common questions about life insurance and clarify the confusion surrounding them. Let’s explore why it’s far from being the burden or con many people assume it to be.

What Exactly is Life Insurance?

Life insurance is a financial agreement between an individual and an insurance company. In this contract, the insurance company commits to paying the policyholder’s beneficiaries a designated sum in the event of their death or after a specified period.

In exchange, the policyholder pays regular premiums to maintain the coverage. Life insurance serves as a financial safety net, offering peace of mind and support for loved ones when it’s needed most.

 

What Are the Different Types of Life Insurance?

Life insurance comes in various forms, but there are three main types to consider.

1. Endowment Plans

This is the most common type of life insurance in Kenya. It combines two objectives: wealth creation and wealth protection. The policy pays out either at maturity or upon the policyholder’s death, whichever comes first. However, this dual-purpose nature often compromises both goals.

I generally don’t recommend endowment plans. The sum assured for your dependents tends to be minimal, and the returns on savings are often far less competitive compared to other investment options.

That said, endowment plans can be a good choice for individuals who struggle with saving discipline. Since premiums are compulsory and withdrawals are restricted, they encourage consistent contributions and long-term financial commitment. But if you’re seeking a more robust way to protect your family or grow wealth, there are better alternatives to consider.

2. Term Life Insurance

Term life insurance is the most affordable form of life insurance. It provides pure death benefits, meaning the insurer pays out only if the insured person passes away within the policy’s term.

This type of cover is ideal for specific needs, such as mortgage insurance or key man insurance for businesses. Additionally, it can be paired with an investment product, such as a money market fund (MMF), to create a comprehensive plan for securing your children’s education or other financial goals.

While it doesn’t include savings or investment features, term life insurance is straightforward and cost-effective, making it a great option for those seeking reliable protection at an affordable price.

3. Whole Life Insurance

Whole life insurance provides death benefits to your beneficiaries while offering optional add-ons, known as riders, for additional coverage. These riders can include payouts in cases of critical illness or personal accidents, providing a more comprehensive safety net.

You can pay premiums for a fixed period, such as 10, 15, or 20 years, or your entire life. Whole life insurance is particularly suited for protection, liquid inheritance, and income replacement, making it a versatile and reliable option.

This policy strikes a balance between affordability and benefits, making it a mid-cost cover that I highly recommend everyone consider as part of their wealth protection strategy.

In this discussion, we’ll focus primarily on the whole life cover and why it’s an essential tool for long-term financial security. This is the only life insurance product that I highly recommend to my clients as it helps them build their wealth protection portfolio and it also plays a crucial role in estate planning.

 

Why is Life Insurance Important?

1. Income Protection

One of the key reasons life insurance is vital is income protection. For families that rely on a sole breadwinner, the sudden loss of income due to death, critical illness, or a personal accident can be devastating.

Life insurance steps in to fill this gap by providing payouts that act as a substitute for the lost paycheck. These funds ensure your family can maintain financial stability, covering essential expenses and helping them rebuild their lives after unexpected events.

2. Wealth Preservation

Life insurance is an effective tool for preserving wealth and ensuring smooth generational transfers. One major advantage is that insurance payouts are tax-free, allowing your beneficiaries to receive the full benefit without deductions.

Additionally, life insurance policies bypass the lengthy and often contentious probate process. Since they cannot be contested in court, the funds are paid directly to the named beneficiaries, ensuring a swift and hassle-free transfer of wealth to your loved ones.

3. Enhancing Your Estate Planning

Life insurance is a powerful tool for estate planning. By naming a family trust fund as the beneficiary of your policy, you can inject much-needed liquidity into the trust upon your death.

Unlike other assets that may take time to liquidate or process, life insurance payouts are typically made within two weeks. This ensures that your family has immediate access to funds, preventing the need to prematurely sell investments or properties during a period of emotional and financial stress.

Incorporating life insurance into your estate plan provides stability and safeguards your family’s long-term financial well-being.

4. Ensuring Continuity in the Family Unit

Life insurance provides financial stability during difficult times, allowing families to focus on healing and supporting one another without the added burden of financial stress.

By covering essential expenses and future needs, life insurance ensures that the family can maintain their standard of living and preserve their unity even after the loss of a loved one. This peace of mind is invaluable during periods of emotional recovery.

 

Can a Young Person Benefit from Life Insurance?

Yes, a young person can benefit from life insurance. While whole life insurance is often associated with older individuals, it offers both living and death benefits, making it a valuable option for anyone, regardless of age.

When you add critical illness or personal accident riders to the policy, it becomes even more relevant, providing essential coverage for unexpected events that could affect anyone at any stage of life.

Another significant advantage of getting life insurance while young is that premiums are typically much lower. By securing coverage early, you lock in affordable rates, which means you’ll pay much less over the long term. On the other hand, if you wait until you’re older, premiums will be higher, and you’ll end up paying much more for the same level of coverage.

Starting early not only ensures better financial protection but also offers significant savings.

 

Do Life Insurance Companies Always Deny Claims?

No, life insurance companies do not always deny claims. Their goal is to honor valid claims based on the terms and conditions outlined in the policy. Insurance policies are contracts of utmost good faith, meaning the insured must disclose all required information truthfully and accurately when applying for coverage.

That said, some insurance companies may have poor claim settlement ratios. Researching and checking an insurer’s track record, which can be done through resources like the Insurance Regulatory Authority (IRA) website, is essential.

To ensure a smooth claims process, it’s advisable to work with a reputable company that has a proven history of fairly and promptly settling claims.

 

How Does a Sample Use Case of a Whole Life Cover Look Like?

Here’s an example of how a whole life insurance policy can be used for wealth protection:

Imagine a 35-year-old woman who wants to secure an inheritance for her family. She opts for a whole life cover with the following features:

Life Cover: KES 20 million

Critical Illness Cover: KES 10 million

Accidental Disability Cover: KES 10 million

Payment Term: 20 years

Monthly Premium: KES 15,880

If the woman survives the entire 20-year term, here’s how the financials break down:

Money In: KES 15,880 per month for 12 months over 20 years = KES 3,739,200 in total premiums paid.

Money Out: Upon her death, her family will receive KES 20 million in life cover plus an additional KES 8 million in accumulated bonuses, totaling KES 28 million.

However, if she passes before completing the 20 years, the family still receives the KES 20 million life cover, along with any bonuses that have accumulated up to the time of death.

This payout is guaranteed, as death benefits are assured in a whole-life policy, ensuring financial protection for the family no matter when the policyholder passes.

Please note that the example provided is for illustration purposes only. Actual premiums and benefits may vary depending on several factors, including Age, Gender, Smoking Status, Medical History, and Policy Duration.

If you would like a personalized whole life insurance quotation to see how your premiums and life cover would look, feel free to fill in this form. I will email you the customized details.

 

What Factors Should You Consider When Looking for an Insurance Cover?

When choosing an insurance cover, it’s important to take several factors into account to ensure that the policy aligns with your needs and financial situation. Here are some key things to consider:

  1. What Type of Insurance Do You Need?
    The type of life insurance you choose should be based on the reason you need coverage in the first place. Are you looking for financial protection for your family, wealth accumulation, or both? Different policies (such as whole life, term life, or endowment) offer varying benefits, so understanding your primary goal is crucial.
  2. What Amount of Money Can You Comfortably Afford to Pay in Premiums?
    Premiums vary depending on the type of policy, coverage amount, and other factors. It’s important to assess your financial situation and choose a premium amount that you can comfortably afford. Don’t stretch yourself too thin—ensure that your premium payments won’t cause undue strain on your budget.
  3. Understand the Basic Insurance Language
    Insurance policies come with specific terms and conditions that you need to understand before committing. Familiarize yourself with terms like premiums, sum assured, cash value, riders, and death benefit. These are all important aspects that will impact the benefits and costs of your coverage. Understanding these terms will help you make an informed decision and avoid any surprises later on.
  4. Determine the Protection You Need
    To ensure you have adequate coverage, use the 10X rule as a guideline. The sum assured on your life insurance policy should ideally be 10 times your annual income. This ensures that your family or beneficiaries will have sufficient financial support in case something happens to you.
  5. Know Your Insurer
    A life insurance policy is only as valuable as the company backing it. It’s essential to choose an insurer with a strong track record of paying out claims promptly and fairly. Consider researching an insurance company’s claims settlement ratio to ensure they are reputable and reliable. You can find this information on the IRA (Insurance Regulatory Authority) website, which provides useful insights into the performance and reliability of various insurers.

 

This article, explores the importance of life insurance and the various types of coverage available, from whole life to term life. Life insurance can offer income protection, preserve wealth, enhance estate planning, and ensure continuity in the family unit. While a good number of insurance policies are great wealth protection schemes, some might not be the best for you. Check out my article on Why Education Insurance Policies are Poor Products.

If you would like help in getting a good life cover from a reliable company to help build your wealth protection portfolio, you can fill in this questionnaire, and I will personally get back to you with sample quotations and more feedback.