In an exciting collaboration between Minet Malawi, Britam, and The Daily Times - Malawi's leading newspaper - we are thrilled to introduce a groundbreaking initiative that will redefine your Wednesdays. Welcome to the Insurance Insights Column – a weekly rendezvous with the world of insurance and contemporary issues that matter. Every article aims to illuminate the intricate landscape of insurance products and relevant topics that impact us all. The articles will be educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on March 27th, 2024
Cash values of life insurance policies can be viewed as savings to be drawn upon when needed. However, you borrow cash values with necessity of repayment.
One may enlarge one’s estate value by borrowing cash values from one’s life insurance policy and reinvest the proceeds elsewhere for a greater income return. We have come across policyholders borrowing cash values for other investments considered to have greater returns than life insurance and at acceptable risk level such as purchasing stocks at Malawi Stock Exchange or investing in real property.
Nonetheless, death benefits of one’s life insurance policy are reduced by loan amount that one makes against it. The good part of it is that the total estate value – balance - may still be reasonable.
Let us look at one example. Suppose you own a ten-year ordinary life insurance policy with sum assured of MWK5,000,000 and your premium contributions have accumulated to MWK200,000. You might have an impression that your life insurer will give you a loan amount of K200,000. Wake up dear policyholder. The maximum amount that the insurer can lend you is a certain percentage of your accumulated contribution, popularly referred to as surrender value. There is no fixed formula to calculate percentage of loan amount. The multiplier is arrived at after considering several factors such as your age at the time of borrowing, unexpired period to maturity, monthly premium, inflation rate and many more factors. If you die during the ten-year period, as explained above, your estate will be reduced by the amount you borrowed less interest on the loan plus policy bonuses accumulated over the years.
Back in the day, in our economics class, we learned that one of the salient characteristics of good money is that it must be scarce - mind you, there is also bad money. The case in point is that in addition to fixing a ceiling on how much you can borrow on your policy, the life insurer will also charge interest on the amount borrowed. There are no handouts in insurance. For instance, it can be 30 per cent per annum which is equivalent to 2.5 per cent per month. The good thing is that interest is charged monthly on the balance of loan, not on capital. Repayment is arranged using reducing balance calculation.
The other good thing about saving through life insurance is that the cash value has complete immunity of any creditors - yes, full immunity. No matter how illiterate your legal beneficiaries may be, there is a guarantee for them to receive the benefits of life insurance in full. However, creditors will only come in if your policy was assigned as security in their favor.
Therefore, when arranging life insurance, it is necessary to incorporate into the policy what insurance people call non-forfeiture clause. This provision stipulates that should you be unable to pay premium for whatever cause or reason after you have made a substantial contribution, usually after two years – in Malawi - instead of lapsing your policy, you may keep it in full force for some time by using the cash values to extend the term and continue with full-face amount of protection.
Alternatively, you may use cash values to pay up a policy for a reduced amount. This helps you to continue enjoy some protection as long as you are alive. In this way premium payment can be discontinued with loss of part of the original protection only.
Revolutionary life insurers are able to insure life of certain key individuals of an organization. In doing this, any loss in value of the business that comes along with death of such individuals is offset. A key person may be a star performing chief executive officer or a judicious marketing manager or a brilliant newspaper reporter or an astute financier of an organization. It has been evidenced in our market, Malawi, and elsewhere that death of such people brings considerable financial loss to an organization. In mature insurance markets, it is common for organizations to insure their chief executives or any high-spirited leaders against loss of business value following death or unexplained disappearance. Talk to us. Here to serve.
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