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Whole Life Insurance vs. Universal Life Insurance: Know the Difference

dateKnowledge Centre Team dateApril 22, 2021 views211 Views
Whole Life Insurance vs. Universal Life Insurance: Know the Difference

Buying a life insurance plan is not as complicated or confusing as it once used to be. But often, the kind of lingo used by banks to differentiate between different types of products they offer can befuddle someone who is new to the world of finance and investment. The closest some people come to have a financial portfolio is to get life insurance for themselves or their family, but sometimes even something as simple as insurance comes with a myriad of clauses and categories that can make the average citizen dread going to the bank.

One such confusing and similar-sounding set of terms is that of ‘whole life insurance’ and ‘universal life insurance - they may sound almost synonymous to you, but their implications in the banking sector are quite differentiated.

What is Whole Life Insurance?

To put it simply, whole life insurance provides coverage for your entire life, i.e., for as long as you live. This implies that even if you pay the premium amounts only for a specific and predetermined period of time, the death benefit that is promised by the bank will be valid for the remainder of your existence.

A whole life insurance plan is often recommended for people with families that have a lot of dependents, especially if the potential policyholder is the leading breadwinner of the family whose loss will be felt sorely in terms of finance. Whole life insurances can provide the peace of mind that the dependents will be taken care of if the policyholder dies an early and unfortunate death.

The amount accumulates over the years and becomes available to the policyholder or their dependents on maturity, by which time it would be significant enough an amount to cover whatever expenses the family may need after the death has occurred. The savings amount is also kept on a tax-deferred basis and can be borrowed if there is a need for it.

In this manner, whole life insurance helps an individual complete their long term financial goals for the entirety of their lives. Because it functions both as insurance and savings, banks tend to ask for higher premiums compared to ordinary term insurance.

What is Universal Life Insurance?

Universal Life Insurance is different from an ordinary life insurance plan because it is far more flexible in terms of the death benefit amount, which you can increase or decrease depending on your health and your preferences.

Of course, to increase the assured sum that is your insurance cover, you have to undergo a thorough medical examination that assures the bank that you are in good health. Decreasing the coverage, which means paying fewer premiums, can be done without giving up the entire policy if you pay a small amount as surrender charges.

Learn more on increasing sum assured in a term insurance plan and how it can beat the inflation.

The flexibility also extends to the frequency of the payment. Under universal life insurance, you can pay the premiums at any time; even all at one go, if you prefer a lump sum. From this amount, a policyholder can withdraw smaller sums partially, mimicking the way investment components work in other insurance-savings plans.

The only con of universal life insurance is that if the policy starts performing poorly, you cannot expect growth - you may end up spending a lot of money as premiums to keep the cash-value amount to the highest, and backing outcomes with the risk of high surrender charges. However, if flexibility is one of your priorities, you should definitely choose universal life insurance.

Differences between Whole Life Insurance and Universal Life Insurance

People are often torn between the two, but both whole life insurance and universal life insurance are permanent life insurance policies that combine components of life coverage and investment. The main difference between the two types is flexibility.

While universal life insurance is far more flexible on many fronts, the assurance and consistency that a whole life insurance policy offers is a robust income replacement in case something happens to the policyholder and the dependents need to be taken care of.

Which One should you Choose?

Your choice between universal life insurance and a whole life insurance plan depends entirely on what you are looking for. If you are searching for a policy that offers consistency and an assured payout that is predetermined, you should not think twice before opting for whole life insurance.

But if you are a risk-taker who prefers flexibility or are someone who cannot afford to pay for a whole life cover, universal life insurance is the choice for you since it can adapt to your financial situation.

People whose professions do not assure a stable flow of income usually prefer to go for universal life insurance, while people with a large number of dependents choose whole life insurance. Whole life insurances are highly recommended for people whose largest incentive to purchase insurance is their concern for their family’s future. Also, there are term insurance plans that offer whole life option along with return of premium. If you opt for such a plan, it’s a complete win-win for you.

Learn why a whole life plan with ROP is the smarter way of buying life insurance.

How iSelect Star Term Insurance Plan can Benefit you with a Whole Life Option?

Canara HSBC Oriental Bank of Commerce Life Insurance offers term insurance plan with whole life option in India. iSelect Star Term Plan comes with the following additional perks, which are helpful for anyone’s financial portfolio:

  • Assured returns of premium, with an affordably priced premium rate. This makes it easier for you to align your plan with your financial status and goals.
  • Increasing sum assured, as well as the option to change your coverage by purchasing additional inbuilt coverages for Accidental Death, Child Support, and in case of accidents.
  • Cover your spouse in the same plan so that you do not have to purchase a second plan.
  • Limited premium payment options.
  • Tax benefits depending on the prevailing tax laws.
  • There are multiple options to receive benefits either as a lump-sum or in settlements as monthly income or a combination of the two options.
ULIPs for planning your retirement

Purchasing a term insurance plan with a whole life option like iSelect Star can give your family the confidence to broaden their horizons without the fear of financial crisis. On the other hand, the flexibility of the universal life cover can give you options that whole life plans may not offer. At the end of the day, the choice between the two depends on what is best suited for your situation and family.

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Frequently Asked Questions (FAQs) for Term Insurance

A person can only purchase a term insurance plan till the age of 65 years, and they can choose the risk coverage for up to 99 years of age. One can easily buy the best online term plan between the age of 18 to 65 years.

This being a term plan doesn't offer any payout after maturity or expiration date.

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 70 years of age.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly.

If your key purpose is to give your Family financial protection, go for the term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, a term plan pays a part of the sum insured to treat your disease.

Term insurance riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term policy remains active until the expiration date.
  • Income Rider: The rider ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to Ask while Buying a Term Insurance?

  1. 1. Amount of premium you have to pay based on your age, habits, education, and monthly income
  2. 2. The total number of benefits covered in the term plan. Do they include benefits that you care about the most?
  3. 3. How to save money on tax if you pay for the term plan?
  4. 4. Do they offer regular income options?
  5. 5. Can you change the coverage and premium in the future?
  6. 6. Does the claim consider valid if death occurs outside India?
  7. 7. Which kind of death is not covered by insurance?
  8. 8. Can NRIs take term insurance? If yes, what are the conditions?
  9. 9. Does the term insurance plan have a cash value if you decide to cancel the policy?
  10. 10. Under what circumstances can a term insurance plan be cancelled?
  11. 11. Can I pay the premiums online or make electronic payments?
  12. 12. What will happen to the term plan if the life assured starts smoking after purchasing the policy?
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