What is a Whole Life Insurance Plan?

Did you know that one of the most common motivations for purchasing term insurance policies is marriage?

Makes sense, doesn’t it?

I mean, you are emotionally, physically, and financially responsible for another individual. So, naturally, you would want to secure their future in the face of your unfortunate absence!

So, say it’s marriage, childbirth, or an increase in salary that encouraged you to buy a term insurance policy; how do you get on with it?

As our advisors at Ditto would say -

STEP 1: Get a reality check on your current financial bandwidth (ensuring that you can afford to pay your premiums without compromising your current lifestyle and expenses).

STEP 2: Analyse your sum assured by considering the years till your retirement, the number and age of your dependents, current financial obligations (loans, etc.), inflation rate, and age till which you seek coverage.

STEP 3: Approach a credible term insurance provider after careful consideration of their Claim Settlement Ratio (CSR), Amount Settlement Ratio (ASR), complaint volume,  track record, and life insurance product portfolio.

STEP 4: Opt for a suitable term insurance policy that caters to your financial goals and evolving financial requirements over the years because this policy is a long-term financial commitment that is meant to safeguard your family’s financial future in your absence. The sum assured so obtained is meant to help your loved ones achieve their life’s goals without any financial hurdles.

In our experience, it is the 2nd step where everyone comes to make a mistake. We usually advise them to

1. Use our free calculator to compute their ideal term insurance coverage amount.
2. Refer to our advisors to understand what their ideal term insurance tenure would be based on their age, income slab, age of dependents, etc.

More often than not, since potential policyholders are unaware that term insurance policies can have and must have an ideal policy period, they purchase plans with coverage of till they are 99 or 100 years old (also called whole life insurance policies). The idea is, “Now, nothing can go wrong since my family will get something out of this plan, considering I will definitely pass away within this tenure.”

Is this true? Are whole life insurance plans really as golden as they seem on pen and paper? Are these policies the ultimate financial umbrella that offers you the best features and coverage at optimum premiums? Should they be your smart financial move?

Here’s the truth!

What is Whole Life Insurance?

Whole life insurance plans are a type of life insurance plan that offers you coverage till you are 99 or 100 years old. The concept is similar to that of term insurance plans wherein there is a death benefit involved (the amount disbursed by the insurer in case the insured passes away within the policy tenure). However, in whole life insurance, the death benefit payout is guaranteed, considering that it offers coverage for a long period and the average life expectancy in India is between 60 and 70 years. Hence, the product has become a popular purchase among policyholders.

Here’s a quick look at the most common features of a whole life insurance plan -

• Lifetime Coverage and Guaranteed Benefits: Offering coverage until age 99 or 100, whole life insurance ensures an assured payout since it surpasses the average life expectancy.
• Death Benefit: Similar to term insurance, the beneficiary receives a predetermined death benefit if the policyholder passes away during the policy tenure.
• Dividends: Some whole life insurance policies offer dividends, which can be used to increase the policy's cash value, reduce premiums, or purchase additional coverage.
• Cash Value: These plans include a savings component that grows tax-deferred over time, known as cash value.

However, the question still remains - should you opt for a whole life insurance policy or not? This requires you to weigh out the pros and cons of such plans -

What are the Advantages of Buying Whole Life Insurance Plans?

As life insurance policies became popular over the last few years, so did whole life insurance policies. This is majorly because of the highlighted pros of this financial product -

1. Flexibility: Some whole life insurance plans offer dividends, providing flexibility to reduce premiums, add coverage, or increase the plan's cash value.
2. Cash Value: Whole life insurance plans include a savings component known as cash value.
3. Financial Security: The death benefit and cash value components of whole life insurance plans contribute to ensuring financial security for the policyholder and their family.
4. Extensive Tenure: Whole life insurance plans offer coverage until you turn 99 or 100, eliminating the need to determine the ideal policy tenure.
5. Tax Benefits: Premiums paid for whole life insurance policies provide tax benefits, and the growth in cash value is tax-deferred.

What are the Disadvantages of Buying Whole Life Insurance Plans?

Much like any financial product - whole life insurance plans, too, come with their own set of caveats -

1. Complex policy structure - When you purchase a life insurance plan, you want a policy that is easy to decipher, which is the case with term insurance plans. However, in the case of whole life insurance policies, apart from the death benefit option (that is, the sum paid to the beneficiaries in the event of the policyholder’s death during the policy period), there is also a cash value and dividend angle that needs your attention. Analysing the cash value component, its potential growth, and how the dividend works might become overwhelming for potential policyholders with limited knowledge of insurance policies.
2. Pricey premiums - Since whole life insurance almost guarantees you the death benefit payout (since its coverage is till you turn 99 or 100 years old), the insurers face a high risk of payout. Subsequently, the whole life insurance providers demand a higher premium, which might become a financial burden for you.

So, let’s take a quick look at the differences between term insurance plans and whole life insurance policies and then you can decide which policy structure is best suited to meet your financial goals without having you dig a deep hole in your pocket.

What is the Difference Between Whole Life Insurance and Term Insurance Plans?

Should You Opt For Whole Life Insurance and Term Insurance Plans?

Ideally, you should be seeking a protection cover that will stay active as an income replacement to support your dependents until they become financially independent. Keeping this in mind, you should opt for a policy structure wherein the tenure caters to this requirement (aka term insurance plans).

With term insurance policies, you have a few perks that are missing in the whole life insurance plans -

• Pocket-friendly premiums - Term insurance plans offer you access to a high sum assured against a nominal premium. Since the insurers have strict eligibility criteria and a lower risk of payout (thanks to an ideal policy period), such premiums are feasible. This also allows you to have room to spend a part of your savings on investment options. (However, please keep your protection and investment plans separate. Thus, it’s best to avoid ULIP and Endowment policies.)
• Easy-to-understand policy wordings - With term insurance plans, the perks are straightforward - it’s a death benefit payout that is equal to the base sum assured ( + or - any rider sum assured that you have opted for).
• Flexibility via term insurance riders - Unlike popular beliefs, term insurance plans are flexible for customisation. You just need to choose the right term insurance riders like Critical Illness Benefit, Waiver of Premium, Total and Permanent Disability Rider, etc.

What are the Best Term Insurance Policies in India?

Let’s say you have taken us up on our suggestions to opt for a term insurance policy rather than a whole life insurance plan. Under such circumstances, what are the best term insurance providers and top term insurance plans that you can go ahead with? Here’s a quick look!