14 February 2013

Namibia: How Much Insurance Cover Do You Need?


Insurance is not a simple product and buying insurance doesn't make sense for everyone, especially for those who have reached the break-even point of asset accumulation in their life and their investments or assets are enough to take care of the needs of their dependants after their death.

I recently met a delegation of international business personalities who conduct business across the globe, including in Africa. According to their observation, Namibia is one of the safest countries to do business, and the risks broadly defined are very low.

Their observation is confirmed by Namibia's high credit rating relative to other African countries awarded by international ratings agencies.

Yet, one of the ironies of life in Namibia is that the country's population has the most insurance to cover the relatively small amount of risk they face. The number of overlapping insurance policies that many Namibians inadvertently carry demonstrates this. It is my humble opinion that many of these overlapping insurance policies can be eliminated to free up funds for savings or other uses.

In this article, I will approach the topic of insurance in two ways, by first helping you broaden your knowledge of insurance and secondly to assist you to evaluate how much and what type of insurance cover you need.

Life Insurance Policies

"In the world nothing can be said to be certain except death and taxes." This a quote attributed to Ben Franklin. From the above quote, we derive a definition of life insurance as a protection against the loss of income that would result if the person insured passed away. Your surviving dependants or beneficiaries receive the payout proceeds and are thereby safeguarded from the financial impact of your death.

However, before purchasing a life insurance policy, you should consider your current financial situation and the standard of living you want to maintain for your surviving dependant/s. Does it really make sense for you to be drowning in debts and to suffer in the current life just because you want your dependants to live and enjoy a luxury life you yourself never tasted?

Life insurance does not make sense for everyone, and avoid buying a life insurance cover just because an insurance sales agent smiled at you. For example if you have no dependants and you have enough savings and investment that can be converted into cash to cover your debts, and safeguard the lives of your dependants after your death then life insurance is an unnecessary cost for you, as you could channel that money to improve other aspects of your life.

Do your homework before buying life insurance. A personal cash flow analysis is usually necessary in order to determine the true type and amount of insurance cover that must be purchased; otherwise you will keep on buying life insurance policies sold to you by sales insurance agents. The cost of life insurance could reach a point where the monthly premiums you pay to insurance companies could bankrupt you and push you deeper into debt and poverty.

Accidental Death Insurance Policies: If you have dependants or significant debts that outweigh your assets, then you likely will need insurance to ensure that your dependants are looked after if something happens to you, but you must avoid narrowly focused products such as accidental death insurance. Accidental death insurance policy covers you in some of the ways you could die accidentally, that is, dying due to something other than disease or old age.

However, chances are your existing life insurance policy will cover you in most of those events anyway. Basic life and disability insurance covers a person no matter how they die or become disabled. Before you buy a policy you need to check the insurance contract carefully about this form of insurance policy, as it could be costly as happened to one unfortunate Namibian, I will call Mr Z for the purpose of this article.

Mr Z who was a government employee died by natural death in 2000. He was the only breadwinner in the family, with five children and a housewife. He bought a life insurance policy from a local insurance company and pledged this policy against his home loan.

After his death the insurance company refused to honour its obligations, because the life insurance policy stipulated that, the insured must die by accident and not natural causes for the insurance to pay. The surviving family tried all avenues, including the Ombudsman to force the insurance company to own its obligation, but all their efforts failed and their house was put on auction and was sold and the surviving dependants lost their property.

The deceased's life insurance cover was N$650 000, while the outstanding mortgage loan was N$190 000 and the value of the house at the time of his death was N$450 000, so had he taken the right life insurance policy, he would have left his family a net worth of close to N$1 million. After the house was repossessed and sold on auction, the widow and her five children had no income and home in Windhoek and had to relocate back to the village. Yes, the insurance broker or salesman might appear friendly to you and entice you to buy his insurance policy, but some of them will be really mean to your family after your death as this family can testify.

Study Insurance Policy: If you do a proper cash flow analysis and take the right life insurance policy, then a study insurance coverage may be optional or not needed at all. In addition, there are many better ways of saving for your child to cover for the future cost of education. I have never taken a study policy before and for each child I have invested in property that is financed through the bank and monthly installment on the houses are paid by tenants.

If I die before there is enough equity value on my properties, my life insurance policy payout will take care of the children's education needs. Seven years ago I assisted a single mother who was in a debt trap and financial mess to restructure her finances and to get her out of debt and this exercise ended up in her cancelling four study policies, two life insurance policies and one funeral policy.

She was basically over insured. The single mother was earning a net monthly salary of N$12 500 and was paying a monthly amount of N$3900 in insurance premiums or 31% of her monthly salary.

After the re-structuring exercise we brought down her total monthly insurance premium to N$2 145 or 17% of her total monthly salary, a savings of N$1755. Instead of study policies, my advice to the single mother was to start buying properties for investment purpose and after seven years since our major restructuring of her finances, the single mother has accumulated four residential properties, including the one she resides in and based on the latest valuations she can receive a net income of N$2.4 million if she sells the four properties. Her first born is going to university this year and will need N$35 000 for her education in 2013, but this single mother's child did very well in her grade 12, that she received a bursary and therefore the mother does not need to sell any of her properties.

Remember all these properties were 100 percent financed by the bank, and the monthly rentals continue to cover the instalments.

With the savings she made after cancelling the policies she opened an investment account and started a savings plan to close an income shortfall she may face after her retirement.

Car Insurance: While it is important to insure your car, the money you spend on car insurance could be enough to guarantee you a decent retirement as the following example demonstrates. Mr Y retired end of 2010, and over the past 23 years he possessed four cars, an average of one car every six years. Over the past 23 years he spent more than N$282 000 (N$1021 monthly premium) on car insurance alone, but never received a single cent from insurance companies, because for all the 23 years since he was never involved in a car accident. The one time he submitted a claim for a car break-in, the insurance company refused to pay, because he was accused of negligence.

If he had invested the N$282000 in a combination of shares, properties and bonds over the same period, he would have received by end of 2012, an amount of N$2.8 million at an average return of 16%. For all the past 23 years, this man has been subsidizing recklessly. Remember life insurance is not an investment, but a cover against the risk of death and disability. You have to die to receive payment from your life insurance policy. If you have overlapping insurance policies that provide duplicate coverage on a variety of risks, my advice to you before it is too late is to carefully review all your existing insurance policies, cancel duplicate insurance coverage and you will be surprised to see how much money you save and how fast your overall wealth grows.

Martin Mwinga works for First Capital Treasury Solutions

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