- Forget about the bonuses for a moment. They only confuse matters unnecessarily. Think about it like buying potatoes in a typical Kenyan market. The traders always add a little bonus to the quantity that you purchase – the bakshishi.
- Would you choose one trader over another because you’re being offered a better bakshishi? Obviously not! Your decision is dependent on the price per unit.
- If one trader is offering potatoes at Sh500 per debe and the next one at Sh600; wouldn’t you go for the first one? The added bonus does not feature in your decision!
Last week we saw how life assurance policies work.
The question remaining now is what should one look out for when choosing a policy?
The problem in the market is that insurance company sales agents present all manner of sophisticated calculations to prospective customers promising “handsome returns on investment” yet what they are selling is not an investment!
Typically, the agent will tell you that if you “invest” Sh5,000 every month for 10 years, they will pay you about two per cent of the Sh500,000 every year. Thus in the first year, you will earn a bonus of Sh10,000 even though you have paid in just Sh60,000.
The agent will go ahead and show you that Sh10,000 is 16.67% return on investment – much better than what you can get from bank accounts or even treasury bills! But, as we saw last week, this is a gross misrepresentation of the facts.
The truth is that in such a product, you will get back exactly the same amount of money that you pay in after 10 years. The “return on investment” is zero and this is because the life assurance policy is not an investment. As such it should not be expected to yield any returns.
If that is so, how then should a prospective customer compare several products on offer? The answer lies in determining the value for money. Ask yourself this simple question: what are you getting for the money you are paying?