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

27 May 2016
In case of whole life insurance, policy benefits are not restricted to a fixed term & extend to the entire lifetime of the policyholder.
 
 

Life 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.

Related: Common mistakes while buying insurance [Video]

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 payouts after a fixed number of years or after the policy holder attains a certain age.

Related: Top 6 Factors That Affect How Life Insurance Premium Is Calculated

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 can also withdraw from them

Who are these policies suitable for?

  • People who take the policy young, as that means they can benefit from low premiums throughout their life
  • People who want the security of guaranteed returns, in case of death and survival both

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

Related: 5 things you must know before you buy life insurance

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:

[Quiz]: Are you smarter than your insurance agent?

 

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