Life insurance policy is a contractual agreement between a policyholder and an insurance company. The insurance company is the insurer who promises to pay an appointed beneficiary a sum of money, upon the death of the policyholder. The policyholder in exchange for this service pays a premium.
Types of Life Insurance
The life insurance policies in Nigeria come in different forms depending on the preference of the policyholder. Insurance companies who have their license from the National Insurance Commission to sell life insurance policies offer various products. These different types of life insurance products are to meet specific needs or preferences.
1. Term Life
Term life insurance is a life cover that lasts only for an agreed number of years. As a policyholder, you choose the term or duration you want the policy to run for before expiration. In this type of policy, the insurer only pays in the event of the policyholder’s death. It is usually for a long duration. The most common length is 10, 15, 20, or 30 years.
2. Level term
Here the premium payable by the policyholder is the same throughout the policy.
3. Single premium
This type of Life cover enables the policyholder to pay his policy premium in advance. In this case, You only pay the premium once for the entire duration of the policy.
4. Whole Life
This type of insurance cover is a type of permanent life insurance policy that yields cash value. It is often a combination of investment and life cover.
5. Burial Expenses
A type of life insurance cover that has a small death benefit in burial expenses.
6. Group life insurance
This is a life insurance cover an employer takes for the benefits of the staff. It offers a low premium and the sum assured is usually X3 of the employee’s annual compensation. This type of insurance is compulsory in Nigeria.
7. Keyman Insurance
A business usually buys this type of insurance on behalf of a third party who is very important to the operation of a business. This person could be the CEO or an expatriate from overseas.
How Life Insurance Works
A life insurance policy has three main stages.
An insurance premium is a payment made by the policyholder to the insurer in exchange for a life insurance policy. The premium is calculated by insurance underwriters who factors the policyholder’s gender, age, medical history, occupation, and high-risk habits. All these components are used to compute the insured’s risk profiling. The impact of this risk assessment is the higher your risk, the higher the premium. Also, a portion of the premium goes to the insurance company’s operating expenses.
2. Cash Value
When taking out a life insurance cover, e.g. Whole life policy, a portion is saved into the policyholder’s account. The other part is used to purchase life cover. The cash value of a life insurance policy can be any of the following;
- It is a savings account that the insured can use during the term of the policy without surrendering the policy. For example, the policyholder might request for a loan against the policy’s cash value and pay interest on the loan.
- In the event of termination, the gross amount payable to the insured is usually the cash value on the policy and not the total premium paid.
3. Sum Assured
It is the total sum of money the insurance company guarantees, in the event of the insured’s death. In this case, the insurance company determines if there is an insurable interest in the beneficiary. They also determine if the prospective policyholder qualifies for the coverage based on the company’s underwriting requirements.
In most cases, the policyholder and the insured are usually the same people. However, sometimes they are different. Consider this. A business might buy a keyman insurance policy on behalf of a crucial employee, such as a Managing Director. It makes the company the policyholder and the managing director, the insured.
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