A whole life insurance plan is a type of permanent life insurance plan. It means that the policyholder will be covered for their entire life provided the premiums are paid on time. Whole life insurance is different from term life insurance, which covers you for a period ranging between 10 to 30 years.
Moreover, the whole life insurance is the most frequently purchased permanent life insurance policy, according to the Insurance Information Institute (III). The maturity age for a whole life insurance policy is 100 years, and you can withdraw the term policy or borrow against it anytime. The policy will become matured endowment if the policyholder lives past the maturity age.
How does a whole life insurance work?
Whole life insurance policies cover you for your entire lifetime, and in case if you pass, the policy beneficiaries must file a claim with the insurer. The insurer will then review the circumstances of your passing and will grant the payout (also called the face value or death benefit of the policy) as long as everything is in order.
A whole life insurance policy is different from other types of life insurance policies. You need to understand how it works to decide whether it is a fit for you or not. A whole life insurance plan can be purchased through different payment plans, including a one-off sum, a monthly plan, and a yearly plan.
If you opt for a unit-linked whole life policy, then the payment made by you is not only directed towards the purchase of your insurance plan for payment of the sum assured, but a reminder of the amount is invested in an investment fund. You can also regularly review the policy to analyze whether the value of the policy is equal to the cost of life assurance it provides.
In case the remaining amount which is invested in an investment fund is not performing well enough to cover the cost of benefits, the insurer might suggest you either increase your regular contribution or reduce the amount of sum assured. Also, some whole life insurance policies give you the option to obtain cover against a specific disability or illness.
You also need to inform your family members about those who are all the beneficiaries of your life insurance policy because if they don't know that they are the beneficiaries, they might not be able to claim the assured sum should you pass.
Key elements of a whole life insurance
Every whole life insurance policy contains few key elements:
The death benefit is also known as the face value of the policy, which refers to the payout received by the beneficiaries upon your passing. Death benefits are exempted from taxes if you are below state and federal estate exemption levels, which is applicable for most households. Whole life insurances are usually expensive compared to other best term insurance plans, but the death benefit is proportionate to the cost.
You might also find policies, such as final expense whole life insurance, which comes with a death benefit of a few thousand rupees. These policies are less expensive as they offer a low face value and are designed to cover end-of-life costs.
It is the cost of the policy and can be paid monthly, bi-annually, or annually, depending on your insurer. Premiums are usually paid for the life of the policy. Nevertheless, you can opt for paying higher premiums for a shortened period, such as 20 years, to make sure that your policy does not lapse later.
It is the best term plan payment choice if you currently have high incomes and can cover costs to lock-in coverage for your family. If you can afford it, whole life insurance is the easiest way to minimize your family's financial risk profile.
Like other permanent life insurance plans, whole life insurance plans accrue a cash value over time. It is the amount that you will get if you surrender the policy to the insurer. It will not be added to the face value of the policy that is received by the beneficiaries.
The cash value grows tax-free over time and guarantees growth at a significant rate in the case of whole life insurance policies. It is the reason why life insurance policies are frequently referred to as an investment vehicle.
The cash value can be used to:
- Pay premiums
- Purchase additional coverage
- Withdraw (in some cases)
- Provide a tax-free loan
If you borrow against your whole life insurance's cash value, then the loan value will be deducted from your policy's death benefit.
Type of whole life insurance policy
You can avail different types of whole life insurance policies that are available in the market. They are designed to cater to different types of requirements. Let us look into the details to get a clear understanding.
- Non-participating whole life insurance
Non-participating whole life insurance comes with a level premium and face amount throughout your entire life. The advantages of this policy are its relatively low premium payments and fixed costs. However, it does not pay you any dividends.
- Participating whole life insurance
The most attractive feature of a participating whole life insurance policy is that it pays dividends. Payment of dividends indicates that excess earnings accumulated by the company through savings from favorable mortality of the organization, expenses, and investments.
- Level premium whole life
It is one of the most commonly bought whole life insurance. The premiums will be calculated based on the entire duration of the policy holder's life (up to age 95 or 100), and the policyholder should pay an equal premium amount every month for their entire life.
The advantage of this whole life insurance policy is that it gives you the stability and convenience in knowing how much money is owed on the premium each month. Also, the premiums are standardized and will never increase.
- Limited payment whole life
This is a perfect policy for those who do not wish to pay monthly premiums for the rest of their lives. It is a good choice because with this whole life insurance policy; you can opt for paying the premiums in a much shorter time frame, like in 10 or 20 years. This gives you an assurance that the policy is paid off and will not be voided. Nevertheless, one downside is that the premium amounts that you need to pay will be higher than level premium plans because of the reduced timeframe.
- Single premium whole life
In this whole life insurance plan, you need to pay the full amount of the policy premium in one large payment. This type of insurance policy is often used as an investment, as the buyers need to have a huge amount of cash in hand to make the payment.
The advantage with this whole life insurance policy is that the policy is immediately paid and will have a substantial cash value that can be left to grow tax-deferred or can be borrowed against. The downside of this policy is that you might need to pay a significant fee if you surrender the policy during the first few years.
- Whole life economic
The whole life economic insurance policy has dividends that are used to buy other term life insurance. The advantage of this policy is that you will receive additional face value as time goes by. The drawback is if the insurer's company investments do not perform well, then the face value of the policy may shrink over time.
Financial benefits of whole life insurance policies
A whole life insurance plan comes with certain financial benefits, such as:
- Whole life insurance protection
Get insured for lifetime with the insurance cover that will also cover the expenses of or when critical illnesses are diagnosed.
- Cash value growth
The cash value that your whole life insurance policy accumulates will not be subjected to stock market volatility. Irrespective of the stock market performance, your cash value will grow at a fixed rate. With time, your policy generates cash value that will not be subjected to stock market declines.
- Additional Income
Under IRC Section 1035, your whole life insurance policy can be exchanged with tax penalties for an annuity being absent. It provides you with additional income for life. Make sure that you consult a tax professional or a qualified financial advisor to assess your specific scenario.
Dividends are the money paid to you from the insurer's profits. Although the guarantee of you receiving the dividends being absent, they will be paid as cash, which will be used to reduce the premium payment amount or will be accumulated and used to attract the interest at a significant rate if they are to be paid.
Canara HSBC Oriental Bank Of Commerce Life Insurance offers several whole life insurance policies and some of the best term plans. These keep you and your family financially protected for years to come. Choose a suitable plan for you today and make your future a secured one!