Insurance: 5 years ago, one Saturday morning, I climbed a 27 feet ladder to clean the gutters on the roof of our house after the fall, because the falling leaves from trees around the house had clogged the gutters hindering easy flow of rain water down the sprout. As I was making my way slowly up the ladder, my then 10-year-old daughter, whom I thought was still asleep and whose room is on the first floor of our one-story building house, opened the window to her room, looked at me for one second and asked, “dad, do you have life insurance?”. I said yes while taking the next step up the ladder, then she closed the window and went back to sleep. She will be 15 in the next 7 days.
Up till today, I am not sure how a 10-year-old knew about life insurance, but that question gets me thinking each time I remember that encounter.
Life insurance and estate planning is one of those things people, especially Nigerians, do not want to talk about because they touch on the inevitable, death. No matter how scary the thought of death could be, it is good to factor it into your overall financial planning.
In his “7 Habits of Highly Effective People”, Stephen Covey says that highly effective people live with the end in view. Many people spend time planning about retirement, which is good, but retirement takes care of the future, but we should also plan for the ultimate end because for some retirement may not come but death will sure present itself whenever and wherever. What an unpleasant truth!
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Life insurance has even become more important now in Nigeria than ever before given the number of news about people dropping dead or slumping and dying without any prior signs of illness not to talk about the increased incidence of road accidents and poor health care delivery and facilities.
This article is not meant to scare you but to arouse and sensitize you to the need to do the needful.
Why You Need and Should Get Life Insurance
- Peace of Mind: Like I noted in the introductory part of this piece, by daughter went back to sleep after finding out that I have life insurance and she was not much bothered about me climbing to the top of the roof, that is peace of mind. Having a life insurance reduces anxieties on you and your dependents and such anxiety reduction in turn improves your mental and physical health.
- Payment for Losses: The existence of life insurance often supplies the financial resources that permits a family to continue despite serious losses that have occurred. The death of a breadwinner can bring financial disaster to a family. When a breadwinner dies, family income dies with him/her with the implication that the spouse and/or children may have to give up their home or even schooling and accept undesirable alternatives. But such perils can be met with the proceeds of a life insurance in such a way that the family remains intact after the loss.
- Stimulates Savings: Ownership of a life insurance policy instills or encourages thrift because the premium that you pay each month, although small compared to the possible loss it protects against, is in essence, a prepayment of a potential loss. By making the monthly premium payments, you are saving for the unfortunate event of death. Some life insurance policies have additional savings built into them thereby encouraging even more savings.
- Business Continuity: For those in business of their own or have their own companies, life insurance serves a wide variety of purposes especially in the area of business continuity.
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- Funeral Expense payment: Funerals are becoming increasingly expensive in Nigeria and some families have had to go into various types of debt or even sell landed or other properties to offset the cost of funerals. Of what use is it to subject your family to some debt repayment long after you are gone? If you cannot afford funeral insurance, getting a life insurance can provide a veritable source of fund with which to defray expenses arising from funeral activities.
Who Needs Life Insurance
Life insurance may not be for everyone. An individual’s economic human life value is derived from earnings capacity and the financial dependence of other lives on that earnings capacity. This means that a human life has an economic value only if some other person or persons can expect to derive pecuniary advantage through the existence of that human life. Therefore, if an individual is without dependents and/or other persons or organizations that stand to benefit from his or her living, either now or in the future, then that life has no monetary value that needs to be perpetuated through a life insurance policy. Any one that falls into that category does not need life insurance.
You can Start or make it Small.
You do not have to have a humongous amount of life insurance, it is the total absence of life insurance that matters, not really the value. You do not have to have a whole life insurance as that is much more expensive. You can get a term life insurance which covers your family until such a time that they are no longer dependent on you. If you cannot afford the higher premium that goes with a large value life insurance, opt for what you can afford, although most financial planning experts say that it is better to get large value life insurance when your dependents are young and as they become less dependent on you, you downsize.
When it comes to financial planning, the earlier the better because time, they say, is money. The earlier you start to save, the more you accumulate at the end and with life insurance, the earlier you start, the less your monthly premium because it is believed that younger individuals have less health challenges and lower mortality rate. If you do not yet have life insurance and you have dependents, get one now.
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How interest rates impact your wallet
It is imperative to understand how interest rates impact our wallets.
In the financial world, the interest rate plays a huge role in any financial transaction. Interest rate is the proportion of money a borrower pays for an asset or any form of debt. It is the return or interest paid to the financial service provider.
In Nigeria, interest rates are by financial institutions and the Monetary Policy Committee (MPC) assigned by the federal government to keep interest rates at a moderate and stable price level for proper economic growth.
When it comes to interest rates, either increasing rates or declining rates, the economy gets influenced in many ways. Rates of interest ascertain economic performance. Lower interest rates are a sign of a slow or poor economy as interest rates are changed to enable cash flow.
Higher interest rates are, in turn, viewed as an indicator of a healthy economy with favorable cash flow. Interest rates can slow down or improve an economy. It is necessary to examine the various aspects of our financial life influenced in different rate scenarios to understand how interest rates impact our wallets;
Some ways interest rate can impact your finance are:
Many factors influence how an individual saves, but a decline in interest rates tends to discourage saving because the reward is affected. A higher interest rate makes it attractive to save money as it enhances increased return. Thus, a change in interest rates influences an individual saving, which is an essential part of financial planning.
How you will be affected by a change in interest rate depends on if you are inclined to borrowing or investing. Because the interest placed on loans will be less, lower interest rates offer more opportunities to borrow or acquire cheaper loans, which means it favours the borrowers. People are discouraged from getting loans to invest in their businesses because a higher interest rate translates to a higher borrowing cost.
Lower interest rates allow companies to acquire less costly loans that impact the price of the goods they sell. As far as expenses are concerned, people will have more funds to spend on goods and services.
Interest rates can have an impact on the income people earn by affecting economic growth. Slow economic growth will influence the level of income earned. With substantially less income, people will have less cash to survive on.
When setting financial goals and making meaningful decisions regarding one’s finances, understanding the impact interest rates have on one’s life can help.
How MSMEs can get easy access to finance
MSMEs must take the following steps for loan readiness.
MSMEs are considered the backbone of the Nigerian economy. In 2019, they made up 90% of all registered businesses, contributed more than 50% of the country’s nominal GDP, and employ 84% of its labour force. Despite this, MSMEs were the recipients of less than 5% of all credit granted by the banking industry.
One reason for this is self-selection by MSME owners. Many MSMEs refuse to apply for loans from banks due to a fear of rejection and a belief that banks charge exorbitant fees and request hefty collateral before giving loans to MSMEs. Now more than ever, in this era of cashflow-based lending and low-interest rates, this harmful myth is costing businesses access to finance that they need to scale.
Another reason is the MSMEs’ lack of loan readiness. Unlike large companies, small business owners do not prepare themselves before applying for loans. This causes them to make many mistakes that discourage banks from lending to them due to a fear of non-repayment.
In order to overcome this hurdle and join large businesses in taking advantage of the low-interest climate, MSMEs must take the following steps for loan readiness:
1. Maintain financial records – Research shows that 69% of MSMEs in Nigeria do not keep detailed financial records. As a business owner, you must ensure that funds pass through your business account. Your business’s financial records as reflected in your bank statement will help your bank determine your repayment capacity. This is important, whether you want a collateral-free or collateral-based loan.
2. Use narrations for transfer into personal accounts – Again, always use your business account for business funds. However, if funds must be paid into your personal account for any reason, then ensure that those payments have a narration that reflects the purpose of the payment. For example, Two shirts purchased. This helps isolate business funds from personal when computing your turnover in order to determine your loan amount and repayment capacity.
3. Know what you want – Always know exactly how much you want and what you want it for. If your account officer asks you how much you want and you say “any amount you can give me”, they automatically assume you have no plan for the money or a plan for repayment. Before approaching your bank, determine how much you need and how much you can repay per month, using your monthly income.
4. Have a repayment plan – Always have a plan for repayment. Know how much you can afford to part with per month. Note however that your repayment plan might not align with that of the bank. Banks prefer not to take more than 33% of your monthly income in loan repayments, so your loan repayment period will probably be dependent on how much you can pay per month. Regardless, a well-thought-out repayment plan will build confidence in your repayment ability.
5. Engage your account officer– It is important to have an engagement with your account officer before applying for the loan. Instead of just writing a loan application letter to the bank and waiting for a response. Armed with your financial statement and your knowledge of how much you need and for how long, visit your account officer and have them work with you in getting your loan.
Ese Atakpu is a writer and banker.
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