Recently, a friend informed me that they wanted to do a group life insurance policy for their association, but a member interjected that it is not possible because some of them already have life insurance policies. I quickly corrected him that it is possible to have multiple life insurance policies. We shall come back to this presently. I began to wonder how many more people out there have this erroneous impression and what could be responsible for it.
In dealing with today’s topic, we shall look at two of the six principles of insurance (indemnity and contribution) to aid our understanding. Insurance is divided into two basic types: life insurance and non-life insurance. All policies of non-life insurance are policies of indemnity. What is indemnity? Indemnity in insurance simply means that if a policyholder has an incident and a loss occurs, the amount the policyholder will be entitled to as compensation will be determined by the actual financial loss he suffered subject to the limit of his policy. For instance, if a policyholder’s vehicle is involved in an accident and it will cost N500,000 to put the vehicle in the state it was before the accident, his financial interest is N500,000 and that is all he is entitled as far as this incident is concerned, even if the sum insured of the vehicle is N6,000,000. Indemnity means he can only be placed in the exact financial position he was before the loss, no more.
What if the policyholder also took insurance policies from three other insurance companies to protect the same car, can he approach them to claim N500,000 from each of them? No, sir. That will amount to profit making, which is against the principle of indemnity. What will happen in such a case is that all the insurance companies will come together to pay the claim in ratable proportions. If the claim was filed with only one company, as is usually the case, it will call on the other companies to pay their proportions. This act of coming together is what we call contribution in insurance. That is the second principle of insurance we mentioned earlier. Contribution is a corollary of the principle of indemnity and its primary task is to ensure the principle of indemnity is fully enforced.
As a result of these two principles, policyholders do not insure the full value of same asset with multiple insurance companies because it is a waste of premium (money). For instance, if you bought a car for N6 million, you insure the full value with only one insurance company. You do not go insuring it with companies A, B, C and D for N6 million hoping to claim N24 million, as in the case above, if the car is stolen or totally damaged. The value of your car is N6 million and the four companies will come together to contribute the N6 million. But contribution, like indemnity, happens only in non-life or general business insurance.
In life insurance, the principles of indemnity and contribution do not apply. That is because you cannot place value on life. For instance, how much is your life worth in naira and kobo? You cannot put a value. What applies in life insurance is your ability to pay premium. If you have the capacity, you can even take 20 life insurance policies. So the person who told my friend that you cannot take two life insurance policies is wrong.
In life assurance, you have term assurance (protection policies) and endowment life policies (protection and investment-linked policies). There are many variants of these polices in the Nigerian market and policyholders take products or combinations that suit their circumstances. You can take an education endowment policy to save money for your children’s education. The same person can also take one of these endowment policies specifically tailored to prepare for retirement and old age. If he is an employee, he is expected to be covered by the group life insurance policy of his company. The new Pension Reform Act 2004, as amended in 2014, made Group Life Insurance compulsory for all establishments and companies in Nigeria with three or more employees.
Many churches now take group life insurance policies for groups within the church or even all members of the church. If this policyholder belongs to such a church, he might be part of one or more group life policies within his church. Town unions also take group life insurance for their members, so this fellow will also be part of it. We can go on and on; if he belongs to social clubs, which also take group life insurance for members, he will also be part of schemes. So for just one person, we have mentioned almost 10 life policies and they could easily be more. Now, if this policyholder unfortunately dies, all the insurance policies listed above are liable to pay compensation to his next of kin or named beneficiary (ies) to the limit of the sum assured of each policy. You can see that indemnity and contribution have nothing to do with life insurance, unlike non-life insurance
Insurance thrives in uncertainty. Talking about life insurance, it looks to me like something everyone with responsibilities should take at this time. COVID-19 has brought so much uncertainty into our world. Hundreds of thousands of people are already dead all over the world and we still have no vaccine for prevention or a reliable cure for Corona Virus yet. Certainly, no one wants to die, but deaths are reported every day. We do not know who is next. It looks like a sensible time to take a life insurance policy at least for this period. Such short term life insurance policies are what we call term assurance.
Term assurance is life insurance that provides coverage for a specified period, say one to five years. Thereafter, the assured may renew the policy on existing terms or renegotiated terms. Unlike endowment policies, term assurance policies do not accumulate cash value. If the assured dies during the term, the death benefit will be paid to the beneficiary. But if nothing happens, there is no payment when the policy lapses. Term insurance is the cheapest life insurance cover; it is also a smart way to make financial provisions for loved ones in the event of death, especially those without cash reserves or assets.
Another insurance product I will strongly recommend at this time is the welfare plan for students’ education. Here the school subscribes to the welfare plan and the parents pay premiums, which can be as low as N5,000 per annum, depending on the school fees and other bills and the number of students in the school. In exchange, if a parent, guardian or sponsor of a student dies, the scheme takes over the student’s fees and other specified expenses until the student graduates from the school as long as the school renews the policy annually. Some parents have died since the COVID-19 Pandemic hit our shores. There is no guarantee that more will not die. If the victim was not financially well off, should his children’s education be truncated because of his death. I do not think so. A premium of N5,000 to N10,000 today can make the critical difference. Please talk to a registered insurance broker today for details
Finance February 6, 2020