Does a whole life assurance cover make financial sense?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

02 March 2025

A reputable insurance company [one of the top five in Kenya] sent me an offer for a “whole life assurance” cover recently. It said that, if I pay Sh15,000 monthly for the rest of my life, my beneficiaries will be paid Sh5 million after I die. I this a good deal?

Well, the Sh15,000 premium was calculated on the basis of my current age – and I am not young! If you are younger than me, you would pay less and more, if you are older.

Upon receiving this offer, I asked myself is this: if I saved Sh15,000 every month, how long would it take to accumulate Sh5million? The answer is 333 months, or 27 years and 9 months. Now; do I expect to live that long?

This is probably the greatest challenge that life assurance sales agents face. Every time they make some one and offer, it forces the potential customer begin to think about when they will die. People generally don’t like thinking about dying!

Any way; I searched for the life expectancy of a person my age and found that it is 18 years! In other words, the average duration that people my age will live is the next 18 years – some will die earlier and others will live longer; but when you calculate the average duration they will all live, it comes to 18 years counting from today.

This means that for the people of my age, the insurance company expects to collect the Sh15,000 for 18 years, that is, Sh3.24 million and then pay out Sh5,000,000. If we remove death from our thoughts for a moment, this is a good deal!

The next question then, is where will the insurance company get the extra Sh1.76 million to pay my beneficiaries? It cannot be from other contributions in the kitty. That would make this a Ponzi scheme!

From among my agemates, the only money the insurer can utilize is that from those who live beyond 27 years and 9 months; that is, past the year 2053. The other money available is any returns earned on the Sh15,000 monthly premiums over the entire period.

We may then wonder how hard the insurer has to work to earn enough to pay out the Sh5 million and leave some profit for itself. In September last year, I explained in this column how to do this type of calculation. Following the same steps, the answer comes to an annual return of about 6.5 per cent per annum. I think this is achievable.