Ch. 13: How does Whole Life Insurance work?

How does Whole Life Insurance work?

Whole life insurance secures the financial futures of both you and your family. It provides you a whole life cover so you can leave a legacy for your heirs/successors.

It is important to know how a whole life policy works in detail - so you can make an informed decision if you plan on investing in it.

Let’s have a look!

One of the most crucial steps, when selecting and finalising your insurance policy, is zeroing down on the correct cover amount. Having an insufficient cover may be equal to having no cover at all!

You need to keep in mind the amount of money your family will need for -

• Short-term expenses like school fees, monthly bills, etc.
• Long-term goals like weddings, higher education.
• Paying off any loans and liabilities

Consider every little bit of your finances, including the assets you have and any existing life covers you hold - to make the right decision.

Once you have figured out the amount, you must factor an inflation rate over this amount (for at least 10-15 years). This will give the corpus a nice layer of protection from inflation.

Participating Insurance offers a variable bonus in addition to the benefits paid, whether it is paid as a maturity benefit or as a death benefit. The bonus accrues from the profits the company makes from participating policies. Note, since the returns are higher, the premiums shall be higher as well.

On the other hand, Non-Participating Insurance offers fixed benefits, i.e, the payout that is given to you at the time of policy maturity or the nominee as a death benefit is guaranteed. Because these plans are simpler, the premiums will be lesser.

Both types have their own pros and cons. A Participating policy might be the right choice if you wish to accumulate the extra bonus. Whereas, a Non-Participating policy will be better if you prefer playing safe and want guaranteed returns.

A whole life insurance policy can be customised in accordance with your preferences. You can curate a customised whole insurance policy by taking your family's finances into account.

This can include -

• Limited Pay Option - You can decide to pay off the premiums in a shorter period. This helps you bear the premium payment while you’re earning or have a secure financial net, while enjoying the cover for a lifetime.
• Premium Payment Frequency - You can choose to pay the premium in various instalments including monthly, quarterly, half-yearly, or yearly depending on your preference
• Mode of payout - The cover amount is usually paid out in the form of a single lump sum, which will be a good choice if you have loans and or huge expenses to take care of.
  
  If, in any case, your family isn’t well-versed with how to handle a huge amount of money, you can also opt for an income style payment, where payments are divided into monthly/annual instalments. This will pay your family the cover amount in fixed monthly or yearly instalments over a period of time. This can help your family live their lifestyle, pay for recurring expenses like school fees, grocery, electricity bills, EMIs, etc. and not worry about managing large amounts of money in their bank account.


• Riders -Riders are basically add-on covers available to be bought with your base plan that give you coverage for other important financial risks
  
  Some riders available with whole life plans are -
  
  • Critical Illness rider
  • Accidental death rider
  • Accidental Disability rider
  • Hospital care rider
  • Surgical care rider
  • Waiver of Premium due to disability rider
  • Waiver of Premium due to Critical Illness Rider

You can read about riders in detail here - rider

Please note this list may vary from product to product and insurer to insurer. Read policy documents carefully to stay informed.

The premiums will be calculated on the basis of the cover amount, the premium payment duration, any additional riders you’ve picked, and whether the policy is participating or non-participating.

Once you have given your basic information and selected the policy as well the customization options, and paid the premium, the underwriting process begins. If your application is approved, the policy is issued to you.

It is extremely important that you pay the premiums regularly, before the due date each year, to keep your policy active. Non-payment may lead to the policy lapsing.

Pro Tip: Always put your standing instruction on a bank account, and not on a credit/ debit card - as the cards come with an expiry date, during which your payment might not go through smoothly.

• In case of death
  If you’ve purchased a whole life insurance policy, and you pass away while the policy is active, your nominee will receive a death benefit. The death benefit includes the total sum assured of the policy and any bonuses that may have accrued.
  
  Pro Tip - Keep your nominee informed and well-aware of the policy details and claims process, to make the journey as smooth as possible for them.


• In case of survival
  Whole life policies offer a guaranteed payout as a maturity benefit to you on surviving the entire policy term. The maturity age is usually 99 years, after which you’ll receive the cover amount along with any accrued bonuses.
  
  Some whole life insurance policies also offer an additional survival benefit in the form of periodic payments. It is payable at the end of the premium payment term.
  
  For example - Omkar, a 38-year-old, buys a whole life policy with a premium payment term of 10 years. At the age of 48, when the payment term ends, he may be paid a certain percentage of the coverage amount
  
  in the policy. Say the cover amount is Rs. 15 lakhs, the survival benefit is 5% - the policy will pay Rs. 75000 as a survival benefit. And, once the policy matures, he will receive Rs 15 lakhs and any accrued bonuses as the maturity benefit.

While you invest and continue paying premiums for a whole life insurance policy, there might arise a situation wherein you want to discontinue the policy. This is known as Surrender of the policy. In such a situation, you will receive a surrender value. Surrender value is available only after you’ve paid premiums for two policy years.

Ram purchased a whole life insurance policy at age 30. The cover amount is Rs 20 lakhs, and the premium he pays is Rs 30,000. The premium payment term is 15 years. Since this is a whole life policy, it will be active till he reaches 100 years of age, i.e., for the next 70 years.

For Ram, the whole life insurance policy will work like this:

• If Ram survives the policy term
  In this case, he shall receive the maturity benefit, i.e., the cover amount of Rs 20 lakhs as well as any accrued bonuses. The policy will cease after he is paid the maturity benefit.
  
  He may also be paid a survival benefit - a certain percentage once the premium payment term ends, i.e., after 15 years - when he will be 45 years of age. Say the survival benefit is 4% of the cover amount (Rs 20 lakhs). By this calculation, he will receive Rs 80000 as the survival benefit.


• If Ram passes away in the tenth policy year
  His nominees will be paid the death benefit, i.e., the cover amount of Rs 20 lakhs along with any accrued bonuses. Once the death benefit is paid, the policy shall end.

A whole life insurance policy is meant to take care of both your and your family’s financial well-being. It is a safety net in cases where you have big expenses ahead, or want to invest in the future, or simply want to accrue a fund for your family for when you won’t be around. Saying this, please make sure you have understood how it works and whether it is a requirement for your needs before you opt for it!