Often I come across clients who want to have an insurance cover for their entire lifespan. While it is understandable, it depends on the number of dependants you have. Many advise this plan to those who have no on look after them, unmarried, single mothers, divorcees or those without children are some example.
This insurance plan guarantees a payout whenever the policyholder dies for a premium to be paid all life long. Here, insurance companies add either endowment or savings element to the risk cover to ensure there is a cash value attached. These elements can be incorporated either on a traditional or a unit-linked platform. Most life insurance companies cap the maturity age for the polices between 80 and 100 years, depending upon the date of commencement of the policy.
Types of whole-life plans
The policy benefits are defined in guaranteed terms - sum assured or vested bonus, the insurer declares based on its performance. Bonuses are a percentage of the sum assured and declared at the end of each financial year. The investment risk of guarantees is born by the insurer. On a traditional platform, whole-life plans give policyholders a cover for life. And on their death, cash value to the nominee(s).
These work similarly on unit-linked platform, except the fund value is given as the cash value.
An individual can choose between lifetime and limited premium (5 - 10 years) payment modes. In limited premium plan, the total cover cost remains the same, but the average monthly / yearly premiums would be higher. To illustrate, the premium for a limited payment term of 20 years for a sum assured of Rs 10 lakh (age 25) would be approximately Rs 22,750. For a 30-year old it would cost Rs 25,500 and Rs 40,500 for 45 years.
Some like LIC’s Jeevan Tarang offer triple benefits – whole life cover, yearly income and bonus on maturity. The policy is an investment-cum-whole life plan paying modest returns. It works like a limited-payment moneyback plan, bonus is paid at the end of the payment term, and a fixed percentage of the sum assured is returned every year till death. On death, the nominee gets the sum assured. Many others also have similar plans.
Most whole life plans offer level premium contracts, that is, premiums and death benefits remain the same throughout the policy term. And as always earlier you buy it cheaper it is. To illustrate, the premiums for a sum assured of Rs 10 lakh at age 25, 30 and 45 is approximately Rs 17,500, Rs 19,600 and Rs 35,000 respectively, for a level premium plan to be paid till the maximum age permissible. These policies are expensive than pure life plans.
Advantages of whole-life policies
- Being a very long tenure product, these policies accumulate a big cash reserve which is paid out to the insured at the time of maturity or death.
- Given this plan is available for the entire life, unlike shorter tenure life covers, it ensures the insured has something to pass on to his/her loved ones whenever he dies
- With a built-in savings component, with every premium paid, these policies help in accumulating wealth with the applicable tax benefits
Disadvantages of whole-life plans
- The premiums of these plans are expensive than term covers
- People may lose the inclination to pay premiums for as long as they live and in some cases, may not be able to pay post retirement. The surrender value may not be attractive to exit in later years
- Policyholders cannot control the way money is invested in these plans and may have to settle for lower returns over the long run as its guarantee is based on investments in debt products, which cap growth
When to buy whole-life plans
Whole life policies can be used to make provisions for any medical expenses of terminally ill dependants, funeral costs or for some compulsory dues to be paid on death. Mostly money is not allocated for such expenses, thus adding to the financial stress after ones death. The policy proceeds can be utilised to meet these expenses.
These policies can be used for estate planning as well as the insured can provide in his will that his funeral costs and medical bills, if any, should be met out of the proceeds of this policy. On similar lines, whole-life policies can help in smooth transitioning of an individual’s estate to non-family members by nominating the relevant people in such policies to receive the money after death.
Other than these considerations, individuals could choose to keep distance from whole-life policies. If the primary concern is to have adequate life insurance coverage, the same can be met with other products such as term plans, which offer the cheapest risk coverage.
However, there may be times when whole-life plans make more sense than a term plan. Sample this, a 30-year old buys a term plan for 20 years. The insurance cover will end when he is 50. Considering the increasing life expectancy, he might have 20-30 years of life ahead of him. Add to that, most these days work post retirement. So, of the years left for him, at least 20 would be productive with a remuneration.
He might have met his key financial goals by age 60 but new ones could emerge as part of his retirement planning or post retirement work life. At 50, if he were to secure these, he will find the premium to be high, the medical examination onerous and will struggle to find a plan that meets his needs. If he had bought a whole-life plan at 30, he would have easily met his new goals. Ideally, one should have a term plan for fixed tenure at an early age and a whole-life one with a lower risk cover one can increase over the years.
The writer is a certified financial planner