Life assurance - Inflation, as a function of economics, can have both positive and negative effects. Today, many economists generally favour a slow and steady rate of inflation. To an individual purchasing a life insurance policy, the time period between obtaining the policy and the payment of benefits matters a lot, mainly due to the impact inflation has. The devaluation of the Ugandan Shilling in the late 1980s resulted in losses for many Ugandans who had purchased life insurance.
This highly negative impact may explain the current low uptake of this form of insurance as many old wounds remain unhealed. It goes without saying that in an environment of double-digit inflation, a payout of Shs 200m today will not go anywhere as far if the same amount were to be paid out in 20 years.
Short term contracts, such as annual motor insurance, are hardly affected by the rate of inflation. However, longer term contracts, such as life insurance, whose payout period could be over 20 years, have to offer solutions to tackle the threats posed by inflation.
Two options currently exist. Life policies may be purchased in benchmark currencies, such as the US Dollar, for instance. This option negates issues of volatility brought about by the local currency. Alternatively, some companies offer provisions for inflation. Various names exist for this provision.
They include; Escalator, Update, Inflation Cap and Automatic Inflation Manager. Under this provision, the proposer chooses the rate at which their premiums and hence benefits should increase every year. The rates often vary from 5 per cent to 20 per cent with some insurance companies giving a chance to vary the rate upwards or downwards each passing year, in line with the prevailing inflation rate.
These provisions provide the opportunity to protect your saving from the eroding effects of inflation. Hopefully, the negatives of the past will slowly begin to be turned around and life insurance will be considered as an alternative savings option.
The author is a Chartered Insurer and works for The Insurance Regulatory Authority of Uganda.
By Flavia Mpagi