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A guide to understanding how Life Insurance works: Everything you need to know before buying a policy.

Imagine you happen to have a cold. But due to pressure and deadlines to meet, the work keeps you busy. In the long run, the cold gets worse and develops into Pneumonia.

After being taken to the hospital, the doctor’s report indicates that you need to be admitted in the ICU for a week.

It costs you ksh. 60,000 for the hospital charges. And ksh. 80,000 for the treatment.

This is the time that you start looking for your friends and family members for contributions.

Annual premium of Ksh. 10,000 health insurance could have ensured you paid 0 shillings from your pocket.

Human life is very precious. For that reason, there’s always a need for life insurance.

How does Life Insurance work?

Life insurance in Kenya provides many families with a good and stable way to plan for the way they live currently and in the future.

Because life insurance is a pure death benefit, most Kenyan families use it to provide coverage of financial responsibilities for the insured or the beneficiaries.

Household families can choose from various products that are currently being provided by insurance companies in Kenya.

The various options available for life insurance policies in Kenyan market are:

Whole Life Insurance Cover

Some Insurance companies and Agents call it: Whole of life assurance, sometimes, straight life or ordinary life.

Whole life insurance cover is an example of permanent life insurance. it’s a life assurance that the policyholder pays throughout their life.

The insurance company will pay out a beneficiary or beneficiaries when the policyholder passes on.

The policy provides coverage for the life of the insured person.

The best thing about Whole life insurance policy is that the cover for a policyholder last for lifetime.

This is only possible if the premium payments as agreed in the policy documents were maintained during the period.

Also, the policyholder can enjoy some benefit when still alive. If the policyholder took Whole life with an investment, the policyholder can gain from the bonus declared.

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The bonus is accrued annually based on bonus rate. These can be paid at the end of the premium term of the insurance cover or on death of the life assured.

The two main products on Whole life insurance in Kenya are;

1. Whole life with an investment.

2. Whole life without an investment, offering pure life cover.

Term Life Insurance Cover

Term life insurance or term assurance is another type of life insurance product that is offered by insurance companies in Kenya.

Term life insurance provides coverage at a fixed rate of payments for a limited period of time.

This policy provides protection for a certain period of time or a specified term of years. for example, 5, 15, or 30 years.

It is often referred to as level term policies. If the policyholder dies within the time period specified in the policy cover and the cover is active.

The insurance company will honour the claim by paying out a beneficiary or beneficiaries as compensation for the loss.

When the insurance coverage terms expire, the policy at the previous rate is no longer guaranteed.

The policyholder may either forgo coverage or potentially obtain a new insurance policy with different payments or conditions.

If the life insured dies during the term, the death claim will be honoured.

Many people usually choose Term life insurance over whole life insurance because term insurance is usually much less expensive.

One of the main challenges with term life insurance during renewal is proof of insurability.

For example, the policyholder could approach an insurance company and acquire a term insurance coverage on terminal illness, but may not actually die until after the term expires.

The insured would become uninsurable immediately the term expires, and would be unable to renew the cover or purchase a new policy.

Endowment policy

An endowment policy is a specialized insurance product where, apart from covering the life of the policyholder, it also helps the policyholder save over a specific period of time.

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The insured then is able to get a lump sum payment when the policy matures in case, he/she survives the policy term.

Based on the monthly contributions, the policy holder is guaranteed a certain pay-out, called an ”endowment” when the policy matures.

This policy is different from Term life insurance in that, endowment policy pays the full sum assured to the beneficiaries if the policyholder dies during the policy term.

In Scenarios where the policy holder survives, the insurance company will pay in full the sum assured to the policy holder on maturity.

The key benefits a policy holder can get from an endowment policy plan include; financial protection of loved ones and goal-based savings.

The amount paid at the maturity if the policy holder survives the term can be used to meet various financial needs. Such as funding children’s education, retirement, or buying a house.

The reason many individuals prefer endowment life insurance policy is because; provided the policyholder makes the fixed monthly payments.

The policy promises a risk-free, guaranteed return on a guaranteed date.

Money back policy

Some insurance companies and agents refer to this product as money back extra cash policy.

Money back policy offers an attractive combination of life assurance and savings plans tailored to better meet the policy holder’s needs.

In a money back plan, the policy holder gets a percentage of sum assured at regular intervals, for instance, after every 2 or 5 years depending on the policy selected.

It’s an endowment plan with the benefit of liquidity.

The regular intervals playouts Create wealth for meeting financial needs at key stages in the life of the policy holder.

With a Money back plan, the policy holder receives periodic payment of the sum to be paid out in case of death and the beneficiaries receive it in full in the eventuality the policy holder dies.

The regular intervals playout is known as the ‘survival benefit’ and is paid over the lifetime of the policy.

The Survival Benefits to be paid out periodically to the policy holder are calculated as a percentage of the sum assured.

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For individuals who are risk-averse, a money back plan is a suitable insurance policy to buy.

This policy plan will enable you to save through an insurance plan and also maintain liquidity throughout the term.

An annuity insurance policy plan

An annuity is an insurance policy plan where the policy holder makes a lump-sum payment or series of payments.

 In return, the insured person receives regular disbursements, beginning either immediately or at some point in the future.

An annuity plan gives the policyholder a guaranteed income for the rest of his/her life or for a fixed amount of time.

With Annuities, the policy plan comes in three main types: fixed, variable, and indexed; each one of this variety comes with its own level of risk and pay out potential.

If you are looking for Guaranteed Retirement Income, an annuity plan is the best life insurance product for you. This comes at the age 55 and above.

This insurance product provides the insured with an option of taking an annuity plan where he/she can receive a monthly or annual income once he/she reaches that age.

key takeaway 

Life insurance is that it provides financial security and peace of mind to the policyholder’s loved ones in the event of the policyholder’s untimely death.

It is an important consideration for individuals with dependents or financial obligations, such as a mortgage, and can help ensure that their loved ones are able to cover expenses and maintain their standard of living after they pass away.

It is important to carefully consider one’s individual needs and circumstances when choosing a life insurance policy, as there are a variety of policy types and coverage options available.


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