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Four times your salary: What it really take to protect those you love
Even with all the planning that goes into choosing the right policy, insurers admit that life happens and sometimes, policyholders might stop paying their premiums.
An ideal life insurance cover should range between four and eight times one’s annual gross salary, financial experts say, a figure that often surprises many first-time policy seekers.
Life insurance is about protecting your family’s future, ensuring that in your absence, they can grieve, heal, and rebuild without financial distress. But how do insurers decide what your life is worth, and what determines how much you should actually be covered for?
Your age alone does not determine how much your life is worth to an insurer. Before putting a number on your life, insurers run through your health records, job title, even your weekend habits and whether you smoke.
While age may set the grounds, everything, from pre-existing medical conditions, income stability, education, and lifestyle choices can change your life cover.
Dennis Mworia, general manager at Britam Life Assurance, says the amount of life insurance cover one should have depends on the risks being insured.
“The main risks covered under life insurance contracts are death, disability, and critical illness,” he says.
These are the three pillars of life insurance, and each demands a different level of coverage depending on a person’s financial obligations, health condition and family situation.
For most policyholders, Mr Mworia says that the death cover is the foundation. “Death cover is important for individuals who have dependents, in most cases, where you are the sole breadwinner for your spouse and children.”
The objective of this cover, he says, is to replace their income in the event of their death, to give the family time and space to mourn and reorganise their lives.
Mr Mworia adds that life insurance should ideally range between “four years to eight years of one’s annual gross salary.” The younger the family or dependents, the more coverage one should seek closer to that eight-year mark.
Sum assured vs premium
Sum assured is a guaranteed amount that an insurer agrees to pay your beneficiaries if you die during the policy term. It is the value of the life cover, the amount your dependents would receive in case of your death, or in some policies, it happens when you are totally disabled or diagnosed with a critical illness.
This is different from the premium, which is what you pay regularly to maintain that cover. However, the higher the sum assured, the more protection your family gets but also, the higher the premium you will pay.
Why loans, education, and disability matter
Beyond replacing your income, the actuary notes that the death cover is also important in safeguarding family assets. “Other areas where death cover is needed include any loans or mortgages taken out. It is important to protect your family against recoveries or repossessions of family assets after your death,” he says.
Education planning also comes in as a motivator for parents. “Education plans with life insurance coverage ensure those grand education plans are met whether alive or dead,” he adds.
But the conversation doesn’t end at the death cover. Disability insurance, which is often bundled within life insurance, is equally important.
The objective here is to ensure that one has enough money to cover lost future earnings and maintain independence. “You need the capacity to purchase any devices or equipment necessary to perform your daily activities,” says Mr Mworia.
Right coverage level
He recommends a coverage level of “eight years’ annual salary or higher” for this category because the expenses tend to add up quickly.
When it comes to critical illness, the actuary says that this insurance has coverage for terminal diseases that are usually exclusions or have major restrictions in the standard annual medical insurance covers.
Such policies, he insists provide a lump-sum payout when someone is diagnosed with conditions like stage 2 or 3 cancer, where the treatment can run into millions of shillings.
“In these cases, coverage limits are recommended for amounts between Sh5 million and Sh20 million, depending on the type of hospitals you are accustomed to,” he says.
What drives the cost?
Mr Mworia says premiums are highly dependent on individual risk factors which are the invisible metrics insurers use to gauge your likelihood of making a claim.
“The premium you pay is highly dependent on the insured person’s age, gender, BMI (height-to-weight ratio), individual health status as assessed via medical examination and family health history,” he says.
He adds that when it comes to BMI, higher premiums are charged for those outside the desired range. Insurers rely on the metrics of if you are either overweight or underweight to evaluate your long-term health risk.
Consequently, for the high-value policies, those that go above Sh10 million, Mr Mworia says insurers require more severe checks.
“For those who want large insurance coverage amounts, you will need to go for a medical examination to establish your current state of health. Those with variations from what is normally expected will be charged higher premiums.”
Additionally, he says the individual’s family health history also plays a part, acknowledging that hereditary conditions are among the hardest factors to mitigate yet they are deeply influential in underwriting decisions.
Age curve
Erick Wanting, chief executive of APA Life Assurance, says age plays a big role in determining life insurance pricing.
“When you are younger, from age 18 upwards, you’re very healthy. Your hereditary diseases are much lower, and there’s no reason why you wouldn’t live to a full and healthy life expectancy of age 72 if you’re male and age 75 if you’re female.”
However, he notes how life expectancy is rising globally, but the risk fluctuates with life stages.
“Once you get to about 25 years through to your 30s, you have a slight increase in your pricing, — what we call an accident hump. It’s most applicable to males,” he says.
“Suddenly you’ve got your first job, maybe your first car, and you’re going out to social spots at night. You might be engaging in activities that are slightly higher risk. We do see an increase in motor vehicle accidents and other incidents during that period.” Mr Wanting adds.
By the time one reaches their 30s and 40s, he says, the risk tends to stabilise. “You settle down, start a family, buy a house, and your risk factors decrease. But from about 45 years onwards, hereditary diseases start increasing, the likes of heart disease and cancer, which makes your expected risk much higher.”
Additionally, Mr Wanting says that if you take out a life insurance product at 70 years, realistically, you probably haven’t got 30 years to contribute premiums. It makes sense that it will be much more expensive because the likelihood of a payout within the next five to 10 years is much higher.
Why your friend pays less for the same cover
Mr Wanting argues that if two people applying for the same sum assured, let’s say Sh1 million, will almost certainly not pay the same premium.
“If you’re 37 and I’m 48, your insurance premium will be lower because your lifestyle and hereditary diseases are much lower. At my age, doctors will start saying there’s a chance of lifestyle-related issues, blood pressure, stroke risk, and cancers,” he explains.
The pricing models differ, too.
“There’s a ‘whole of life’ pricing model, where you pay a level premium for life, and a ‘pure age-rated’ premium, where you pay for the risk you are at that age today,” Mr Wanting says.
In a whole-of-life model, he explains, you pay slightly higher if you are young but you get to enjoy its stability later.
“If you start paying at 18 years or 20 years, you will enjoy lower premiums throughout your life compared to someone taking cover at 60 years,” he says.
Beyond the age, insurers also use social and economic indicators as risk proxies. Mr Wanting explains that they use it as a proxy for occupation risk
“If I’m a higher earner or have a higher education, I’m likely to have a well-paying job, which means a lower occupation risk. It also means I might not be catching public transport, I have my own vehicle, access to private medical cover, and possibly a better diet.”
Consequently, he says lower education levels often correlate with higher-risk jobs.
When it comes to gender, he says that there’s a difference between male and female risk because they have different diseases at different ages.
“At a younger age, females might have pregnancy-related issues, while at an older age, males tend to have more lifestyle-related conditions,” he says.
The lifestyle choice that costs you
Mr Wanting is categorical about the impact of smoking on premiums.
“Smoker status is a key pricing differentiator. Smokers pay a far higher premium if you have a dynamic pricing model,” he says. Reasons?
“Your chance of a heart attack or stroke increases by about 50 per cent if you’re a smoker. Generally, if you smoke, you might have more unhealthy practices, you might drink more, eat poorly, or exercise less. Non-smokers tend to be more health-conscious.”
Even with all the planning that goes into choosing the right policy, insurers admit that life happens and sometimes, policyholders might stop paying their premiums. In such cases, there are two options: withdrawals and surrenders.
Withdrawals apply to some investment-linked or savings-type life policies, which allow policyholders to access part of their accumulated funds without completely terminating the policy. However, most pure life policies deal with surrenders where you choose to pull out of the contract entirely.
