Choosing life insurance as an investment vehicle

Gilchrist Badaka It is taboo in most African societies to anticipate the death despite the risk that one may die young or before accomplishing all their plans as far as securing family’s future is concerned. That’s where life insurance, which covers a person’s life, comes in handy. This policy safeguards against the loss of income when the insured person dies, enabling the family members to benefit from the cover. Therefore, the goal of life insurance is to provide financial security for the family after death of the bread winner (policy holder). However, this article examines the benefits of life insurance as an investment vehicle; namely, tax benefit, its proprietary nature, risk sharing and better returns. When a person buys a life insurance policy, their money and that of people having similar fears is put in pool. This is the reserve from which a policy holder’s family is taken care of in case they die. The policy holder’s known family members will be able to continue with education, for instance, based on the premium bought. When one takes an education life insurance cover to, for example, cater for their five-year-old child’s secondary and tertiary education, the insurance company will start paying school fees from the time the child joins secondary school till they complete university. However, you will need to determine the amount of fees you would like the insurer to pay the child’s in future. It is on this that the firm will base to determine the amount of premium you have to pay per month. Otherwise, one would have to top up if the school fees higher than the policy. There is also tax advantage of life insurance. Rwanda’s new tax regime for life insurance does not subject life insurance policy to value added tax (VAT), which promotes life insurance as an investment vehicle. The premiums charged on the provision of life and medical insurance services are exempt from VAT, according to the law. Another merit of life insurance is that it gives ordinary characteristics of property to the policy holder. This means one can go to financial market and sell life insurance policy to someone when one wants to raise money for another investment. This type of arrangement gives value to the life insurance policy, which is not possible for general insurance because general insurance has mostly contractual character. Sale of life insurance is now common in advanced financial markets, where these policies are publicly auctioned. Pension managers buy such policies and continue to pay premium until the person dies. As Rwanda’s financial laws develop, policy holders will be able to trade their policies easily. Investing in life insurance arguably gives slightly better returns compared to a bank savings account. All insurance policies involve an element that not all claims will arise at the same time. Some claims may fail to take place, thus an insurance company has to offer some incentives of better return to attract investors. Quick market research shows that bank market interest rate on saving ranges from 4 to 9 per cent per annum, while that of life insurance can range from 8 to 12 per cent a year. The variance in these rates could look small, but don’t be deceived. Many factors certainly influence investment choices. Financial advisors take into account inflation and risk factors in calculating the net present value of these investments. However, market interest values show that there is strong argument to consider life insurance as an investment strategy. Thus depending on what your overall investment goal is, life insurance can be a good choice for providing long-term goals like education for your children. The writer is a Kigali-based lawyer currently doing professional internship at Rwanda Stock Exchange Email: gilchristbadaka@yahoo.com

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Choosing life insurance as an investment vehicle