The contractor's group-life comfort blanket
Emeka Nwosu (44) is a self-employed building contractor. His wife Ada (40) earns ₦3.6m a year as a teacher; their children are 12 and 7. Emeka's business net profit averaged ₦9m over the last three years but fell to ₦5m in a recession year. The family's annual living costs are ₦7.2m, including a ₦25m mortgage with 12 years remaining. Emeka belongs to a contractors' association group-life scheme with ₦6m cover; he also has a personal accident policy paying ₦3m for accidental death or disability. He has no income protection or critical-illness cover and ₦2m in savings. Eighteen months ago an adviser sold him a 20-year endowment with ₦5m sum assured and a ₦300,000 annual premium; its surrender value is now ₦120,000. Emeka says, 'I am already covered.' He wants to increase his pension contribution instead of buying more protection.
1. Using a needs-based approach, quantify Emeka's life-cover and income-protection gaps. State your assumptions clearly.
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Life cover: family-need method
Assume the family's ₦7.2m living costs fall by 20% if Emeka dies (to ₦5.76m), Ada's income continues at ₦3.6m, and the shortfall is needed for 15 years until the younger child is 22. The annual shortfall is ₦5.76m − ₦3.6m = ₦2.16m. Using a real discount rate of 3%, the annuity factor for 15 years is about 11.94, giving an income-replacement need of ₦25.8m.
Add capital needs: mortgage ₦25m + education ₦8m + final expenses ₦1m = ₦34m. Total need is about ₦59.8m. Deduct existing cover and assets: group life ₦6m + personal accident ₦3m + savings ₦2m = ₦11m. The life-cover gap is approximately ₦48.8m.
Income protection
A reasonable income-replacement target is 60% of average profit: 60% × ₦9m = ₦5.4m a year. There is no income-protection policy, so the gap is the full ₦5.4m. Group life pays only on death and may end when association membership ends; personal accident covers accidents, not illness.
Critical illness
No cover exists. A lump sum of ₦10m would cover adaptation, a period without profit and private medical costs. Treat this as a separate need, not a substitute for income protection.
2. Evaluate the endowment and Emeka's plan to increase his pension contribution instead of buying protection.
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Endowment assessment
The policy costs ₦300,000 a year for ₦5m of cover. Over 20 years the premiums total ₦6m, which is more than the sum assured, before considering charges and lost investment return. After 18 months the surrender value is ₦120,000 against ₦450,000 paid - a loss of about 73%. The cover per naira of premium is poor for a pure protection need.
Pension versus protection
Increasing pension contributions attracts tax relief and builds retirement capital, but pension savings are locked until retirement and cannot replace Emeka's profit if he is ill or dies. Protection is the higher priority while the mortgage and children's education are unfunded.
Recommendation
- Do not surrender the endowment until replacement cover is in force. Obtain a surrender quotation and check for paid-up terms.
- Apply for level term cover of about ₦50m to age 65 and income protection of 60% of profit with a 13- or 26-week deferred period and a benefit period to age 65. Include critical-illness cover if affordable.
- Once term and income protection are in force, surrender the endowment and redirect the ₦300,000 premium to protection and then pension. Illustratively, term cover may cost a fraction of the endowment premium, but the actual premium depends on underwriting.
- Increase pension contributions only after protection and a three-month emergency fund are in place. Use the business's profit variability to justify a flexible pension contribution.
3. What conduct risks arise from the original sale, and what should the adviser do now?
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Conduct risks
- Suitability: a 20-year endowment with ₦5m cover was sold to a contractor whose main need was death and disability protection. The product may not have been suitable.
- Disclosure: the client should have been told the commission, surrender penalties and the difference between savings and protection.
- Replacement: if the new advice involves surrendering the endowment, the adviser must compare the loss of cover and value, and document why replacement is in the client's interest.
- Vulnerability: Emeka's reliance on group life suggests a misunderstanding of cover; the file should record the explanation given.
Action now
Give Emeka a written review of the existing policy. Disclose commission and any conflict. Do not arrange surrender until new cover is in force. Explain the association scheme's limits and the accidental-only scope of the personal accident policy. Record the advice, the client's decision and any declined recommendations. If the original sale appears unsuitable, explain the firm's complaints procedure and escalation route rather than defending the sale.