LIFE INSURANCE PREMIUM RELIEF
INVESTMENT OPPORTUNITY WITH TAX-SAVING FROM
LIFE INSURANCE PREMIUM RELIEF
01 May 2021
What will the Rich do with the tax-saving during the premium payment period on their whole life assurance policy? The annual tax saving from life insurance premium relief presents additional funds for taking advantage of long-term investment opportunities to enhance their estate value.
The Rich are avid investors. They seek knowledge; develop skills, and the ability to manage investment risks. By investing the annual tax saving in financial instruments that are not too risky, they have an assurance of attaining the financial goal of increasing their wealth. A fixed-income security like a federal government saving bond is a good choice for residents of countries where the federal government borrows through bonds. Apart from guaranteed income flow in form of interest payable twice a year, the income is tax-exempt.
In the example in the last article, GHC15,000 annual tax savings are available for investment for 25 years. By investing it in a bond at a coupon rate of 6% per annum on a reinvestment basis, the cumulative value at age 65 will be GHC822,967. That is by investing a total tax saving of GHC375,000 due to paying a total premium of GHC1,250,000. Effectively, the policy costs only GHC427,033 (GHC1,250,000 – GHC822,967).
The Rich may decide to reinvest the GHC822,967. Assuming a 6% annual return on investment from age 65 until death at age 80 or 90, reinvesting will add GHC1,984,271 or GHC3,553,527 to the estate value. It is a wonderful way for multiplying wealth for the next generations.
INHERITANCE TAX AND WHOLE LIFE ASSURANCE:
SOURCE OF LIQUIDITY AND INVESTMENT FUND
Life insurance companies charge a level premium on whole life assurance policies. Whole life policies are protection contracts against financial losses associated with the risk of dying (mortality risk). However, the risk increases with age. Level premium makes policyholders pay more than mortality cost in the initial years of their policies. In later years, mortality cost rises above the level premium.
Life insurers put the excess premium above the mortality cost into a reserve account. They invest the fund to generate returns on investment. The excess premium in the reserve account, and the resulting returns on investment, create a cash value for the whole life policy. The cash value is a proportion of the reserve. It enables policyholders to borrow from their life insurers to meet their liquidity or investment needs.
Policy loan is one of the privileged provisions in life insurance policies. Policyholders can borrow from life insurers based on the provision. Provided the life policy meets the qualifying conditions for a policy loan, policyholders can request policy loans within the cash value at any time. They do not need to disclose any reason for the loan request. There is no need for a credit rating. The cash value serves as collateral security for the loan. Repayment is at their convenience. They may leave the loan unpaid until the whole life policy becomes a claim by death.
Policyholders benefit from the loan provision. It is a source of liquidity for emergency cash needs or for taking investment opportunities.
Profile of Amos Adeoye Falade
Mr. Falade is a 1980 graduate of the University of Ibadan. He holds a Bachelor of Science, Second Class Honours (Upper Division) Degree in Economics (1980), and Master of Communication Arts Degree (2002) from Ibadan. He is an Associate, Chartered Insurance Institute, London (ACII) 1985 and Associate, Chartered Institute of Stockbrokers (ACS) 2010. He also holds the Authorized Dealing Clerk’s Certificate of The Nigerian Stock Exchange (2011). He is a Member of, Equipment Leasing Association of Nigeria (ELAN); Member, Institute of Financial Planners. He is also a Fellow of the West African Insurance Institute.
He specialized in Life Insurance and Pension in his insurance career that commenced in 1975. He attended several courses on life insurance including Actuarial Aspects of Life Insurance by Swiss Re/West African Insurance Institute, Monrovia, Liberia (1984) and India’s National Insurance Academy (1997).
He taught several generations of student life insurance and pension preparatory for the professional examinations of the Chartered Insurance Institute, London from 1987, and Chartered Insurance Institute of Nigeria from 1989. Since 2002, he has taught Pension
Planning & Administration and Life Insurance at the West African Insurance Institute, Banjul, The Gambia where he is a Visiting Lecturer. He is also a resource person for the Association of Investment and Portfolio Managers.
He held top management positions in the financial services industry. He was Head of Pension in Niger Insurance (1982 to 1988); General Manager (Life and Pensions), Nigerian French Insurance Company Limited (1988 – 2003); General Manager/Chief Executive Officer, Guardian Express Assurance Limited (2003 – 2008) where he retired. He was Managing Director/Authorised Dealing Clerk, Golden Capital Plc (2011 – 2014). He is currently a Stockbroker/Dealer on The Nigerian Stock Exchange.
He held several positions in the insurance industry before retiring in 2008. He was Chairman, Life Offices Committee (2003 – 2006) and a Member of the Governing Council of the Nigerian Insurers Association (2007 – 2008). He represented the Association in many national assignments including the Securities and Exchange Commission’s Committee on Pension (2001/2002), and the Central Bank of Nigeria’s Financial Systems Strategy (FSS 2020).
Mr. Falade is a writer. He has written many articles on life insurance and pensions published in local and international professional journals. His four books on
Life Insurance and Life Annuity are in the process of publication.