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Is Whole Life Plan a better life insurance option for you

Life Insurance

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Life Insurance article in Advisorkhoj - Is Whole Life Plan a better life insurance option for you

Whole Life plan provides life insurance cover for the entire life of a person or 100 years, which is less. Unlike fixed term plans or endowment policies, whole life insurance policies provide financial security throughout the life of the insured. However, there is an endowment or "saving" feature built into the whole life plan. A portion of the premium in a whole life plan goes towards the life insurance cover, while the balance is invested to provide return on investment for the insured. Whole life plans are quite popular in the advanced economies like the US, and are gaining popularity in India as well. How does whole life insurance work? The insured pays premiums every till a certain age, known as the maturity age. As discussed earlier, a portion of the premium goes for the life insurance cover and the balance is invested, just like in an endowment plan. If profits are made on the investments, the insured gets a bonus on the invested amount. Once the maturity age is reached, the insured has the option of either continuing with the life insurance cover till death or surrendering the policy and taking the benefits which includes sum assured and bonus, if applicable. What is the maturity age? It is usually between 80 to 100 years, but some plans have lower maturity ages. There are different whole life insurance plans, like policies with single premium, limited pay, limited pay with money back and regular pay options. In the event of an untimely death of the insured, the nominees will receive the sum assured. Generally, the premium for whole life insurance plans remain constant during the entire term of the policy and the insured gets life insurance cover right throughout.

Key Features of Whole Life Insurance

  • Premiums for a whole life are fixed, for the entire life time of the insured. No further medical checks are required and the premiums are frozen, once the policy is issued

  • Usually the premiums increase with the age of the proposer (or the person to be insured)

  • Premiums are expensive compared to term plans

  • Premiums have two components, a risk cover component and an investment component

  • The insured is not entitled to any survival benefit during his or her own lifetime

  • Dependants of the policy holder gets sum assured in the event of death

  • It creates an inheritance for your nominees

  • Whole life plans provide for your post retirement planning. The insured can take a loan against the cash value or draw it out at retirement. It provides funds in time of needs as you can borrow against it or you can withdraw the policy.

  • If the policy holder surrenders the policy, he or she gets the investment value along with the bonus accrued

  • Like all other life insurance policies, premiums are eligible for deduction from taxable income under section 80C

Are Whole Life Insurance Plans suitable for you?

  • Whole life insurance plans are beneficial, if you want to plan your estate and bequeath your financial assets to your nominees

  • Whole life plan, by itself, is not the best retirement planning option. The return on investment in whole life insurance policy, around 5 – 6%, may not be sufficient to meet your retirement needs. There are better investment options to meet your retirement planning requirements. Please read our article, Retirement Planning through Mutual Fund Systematic Investment Plans. However, if you have invested sufficiently for their post retirement needs and intend to invest your additional savings in other avenues, then you may consider whole life insurance.

  • Whole life insurance plans are most beneficial when taken at a younger age since you get the advantage of paying a lower premium over the term of the policy.

Should you opt for term plan or whole life plan?

  • The premium of whole life plan is many more times than that of the premium of a term plan. Compared to a whole life plan, if you buy a term plan and invest the difference in premium between the whole life plan and term plan in a higher yielding investment option, like SIP in a good equity fund, you will be better off in terms of total investment returns in the long term.

  • Term plans have a fixed term. If you are 25 years old and buy a term plan with a 20 year term, beyond the age of 45, you will have no life cover. If you do not have a life insurance policy beyond the expiry of your term plan, then your family will not have the financial protection, in the event of an untimely death, unless you buy another life insurance policy to cover yourself beyond the expiry of your term plan. Whole life plans, on the other hand, cover you for your entire life.

  • The premiums of whole life plans, increase with the age of the proposer (or insurance buyer). For example, if you are 45 years old, then the premium of the whole life plan is very expensive. It would be better, to take a term plan and invest the balance.

Life insurance during retirement

A major appeal of whole life plan is that, it provides life insurance cover even during your retirement, for which you may or may not have to pay premiums, depending on the policy you choose. But the question is do you need life insurance during your retirement? Common sense logic would say that we do not need life insurance after retirement. If your children are financially independent before your retirement, then they do not need the protection of your life insurance, in the event of an untimely death. Since you do not have a professional income during your retirement, there is no financial loss to the dependants, including your dependent spouse in the event of an untimely death during retirement. The addition premium that the policy holder pays for whole life policy can be invested in assets that give better returns. The logic is very sound. However, there are several reasons that compel us to consider whole life insurance plans. The first reason is increased longevity. If you think that, your dependent (e.g. spouse) will outlive you by many years, and your retirement savings may not be sufficient to support her, then taking whole life insurance makes a lot of sense. You give up some income, but you can financially protect your dependants over their lifetime. The other reason is increasing healthcare costs. A long and serious illness that ultimately results in death, is not just emotionally distressful for the dependants, but expensive medical treatments also sets them back financially quite a bit, unless the medical expenses are covered by health insurance.

Conclusion

In this article, we have discussed several considerations, related to buying whole life insurance plans. There are several pros and cons of whole life insurance plans. The suitability of whole life insurance plans depends on your own personal situation. You should consult with your financial adviser, if whole life insurance plan is suitable for you.

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Dwaipayan Bose

An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development

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