Whole life policies for dummies: are they a good way to insure your family?

Life InsuranceLife insurance is one of the pillars of proper financial planning of a family. Often, families get confused as to whether go for fixed term policies or one of the whole life insurance plans available in the market. Today, let us resolve that confusion & understand more about what these plans are all about & how suitable these are for you.

What is a whole life insurance plan?

In a fixed term insurance plan, there is a fixed duration (in years) till which the insurance cover will be active. After this period, the insurance cover ceases.

Unless it is a Term Insurance Plan with Return of Premium (TROP), the insurer does not pay any maturity benefits to the policyholder.

In contrast, whole life plans do not have a fixed term & the plan is effective till the entire life of the policyholder or 100 years, whichever is earlier.

So, while maturity benefit is paid out at a certain age, say 80, even if the insured person lives to say 90 years, insurance cover will remain active till he is alive, and when he dies, his nominee gets the death benefit. The premium remains constant throughout the life of the policyholder.

Also, as compared to the low cost pure term insurance plans which do not offer any surrender/maturity benefit, whole life plans have an investment component too and this is often used as a savings instrument.

The insurer declares a particular bonus rate each year & the policy builds certain cash value over time which can be used for early surrender or obtaining loans in case of any urgent requirement of funds.

Different types of whole life insurance plans

Almost every life insurer in India offers whole life plans as part of their product portfolio. However, minor variations exist within plans on mainly the following parameters:

  • Premium payment options: There are different premium payment options such as single premium, limited premium paying period or whole life premium paying period.
  • Maturity benefit: Some policies issued by private insurers allow successive pay-outs after a fixed number of years or after the policy holder attains a certain age.

The benefits of whole life plans are manifold:

  • Peace of mind is guaranteed with just one plan since they secure you for your whole life, as the name suggests
  • Premium payable does not increase throughout the term of the plan
  • These plans have a savings component built in
  • They create an inheritance for your loved ones
  • Riders can be purchased under these plans to increase and customise coverage.
  • Premium paid under these policies qualify for a tax deduction under Section 80C
  • Most whole life policies can help with unforeseen financial needs as you can take a loan against them and they also allow partial withdrawal.

Who are these policies suitable for?

  • People who have invested for their retirement and now are looking to invest in other avenues
  • People who want to have a large inheritance to pass on to one or more beneficiaries
  • People who take the policy young, as that means they can benefit from low premiums throughout their life

The possible downsides

  • These plans can function as a bundled insurance cum investment solution that can create an inheritance/legacy for the next generation, but some would argue that combining insurance and investment is not a good idea
  • A person generally does not require a life cover post retirement when their beneficiaries can care for themselves and hence the insurance component of the premium may not be useful to every investor

Concept of Term Rider with a Whole Life Plan

In a whole life plan you can cut down the premium payments by discontinuing contribution that goes towards the fund as investment and only continue with the premium component.

For this you need to choose a Whole Life Plan with Term Rider in which the Term Rider premium component cannot be withdrawn and the other portion of the premium can be withdrawn with accrued bonus, if any.

This way you can maintain regular savings and sum assured at the same time since you can withdraw the investment part but still contribute a reduced premium toward the sum assured.

Conclusion

Whole Life insurance policies are one of many options you can consider to protect your family from life’s uncertainties. Before you buy a plan, however, take this quiz to determine how well prepared you are:

Curated from Whole life policies for dummies: are they a good way to insure your family?

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