Five reasons why you must buy a whole-life plan : The Tribune India

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Five reasons why you must buy a whole-life plan

This guide examines the different roles that whole life insurance may play as part of the overall financial plan of an individual.

Five reasons why you must buy a whole-life plan


Aneesh Khanna

This guide examines the different roles that whole life insurance may play as part of the overall financial plan of an individual. Whole life insurance plans offer a unique combination of death benefit, accumulated survival benefits, guarantees and tax advantages that differentiate them from most other types of financial products. A whole-life policy can be a versatile financial asset that helps fulfil different financial needs at various stages of one’s life.

1. Cover for the entire lifespan of a policyholder

Whole-life plans, as the name suggests, cover individuals for an entire life span. This feature differentiates it from other life insurance products that offer insurance cover for a fixed period.

There are situations where a whole-life plan might be more suitable for a customer than a term plan. Term insurance is designed to provide cover for only a limited period of time. As a result, it may expire or become costly when you still need life insurance. Yet, it’s true that term plans are cheap and provide substantial cover early in life. To understand how whole-life plans are a better option than term plans, let's take the case of a 25-year-old who bought a term plan for 20 years.

The insurance cover will end when he turns 45. With life spans becoming longer and longer working years, he might have 30 years of life ahead of him of which at least 20 would be productive with a fairly high income (considering his experience).

Although he would have fulfilled his main financial goals, he may find some new goals (such as planning for his retirement) that will arise, which he will find difficult to fulfil when he is 45. If he were to plan to secure these, he will find the premium to be high, the medical examinations time-consuming, and will struggle to find a plan that meets his needs.

2. Whole-life plans offer guaranteed coverage and survival benefits; these policies also offer tax benefit

Whole life plans build survival benefits overtime, which increase each year. These plans also provide lifetime coverage with guaranteed level premiums for a limited premium payment term.

The premium remains constant during the entire premium payment term and the policyholder gets lifelong cover. The policy offers guaranteed sum assured and vested bonuses that the insurance company declares based on its performance. The tax benefits are available under Sections 80C and 10(10D).

3. It can act as a source of cash and credit

Financial experts often advise people to keep 6-8 months of normal living expenses in liquid assets as a financial safety net in case of illness, disability, job loss or other financial emergencies.

However, with many demands on one’s income, it may be difficult to maintain this level of cash reserves and still meet retirement and other long-term savings goals. A whole-life policy may also be a source of credit for other purposes. There may be times when one will need additional funds to meet major expenses such as college tuition, child’s wedding, or business requirements. A whole-life policy may be a source of funds to help meet these and other financial obligations.

One can especially use the lump sum amount that one receives at fixed intervals. Certain goals such as child’s education fee can be planned as per the expected payouts or policy design.

4. Avail a loan on your policy

The surrender value that a whole-life policy builds over time is much like the increase in value of one’s home or any other asset, and it can be a source of funds for emergencies. In addition, one can borrow against the policy surrender value at any time. A whole-life policy should not be the only source of funds for emergencies. However, it may be an additional financial reserve during times of need. Using a whole-life policy as a source of funds in certain situations may be a better alternative than borrowing against the value of one’s home or from retirement accounts.

5. Allows one to secure savings today and leave a legacy for tomorrow

Whole-life policies on both the spouses will provide an additional financial resource that one can depend upon during the latter part of retirement. As an example, if one predeceases the spouse, the policy death benefit will provide additional financial support for the surviving spouse. The policy on the spouse may then help ensure a minimum bequest to children or grandchildren after the death of the insured. Whole-life plans are ideal for estate planning —individuals who wish to pass on their estate in an unencumbered manner to their legal heirs — as it helps in the creation of wealth.

One must remember these plans come at a cost, which is higher than the pure term plan with no returns.

The author is Chief Strategy & Marketing Officer, IDBI Federal Life Insurance. The views expressed in this article are his own

 

 

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