The coronavirus crisis has showcased how fickle life could be. In these uncertain times, most people have drawn towards life insurance products to protect their families financially in case of an unfortunate event. This is also the time when most of them are giving thought to estate planning for their children. In most cases, parents leave behind wealth in the form of property or cash in bank accounts. Life insurance companies also offer a product called wholelife insurance with the objective of estate transfer. It is an insurance product whose death cover keeps increasing with age through accrued bonuses. Unlike many other investment products, the entire amount that the nominee receives remains tax free.
A pure wholelife insurance product covers an individual for the lifetime. After the death of the policyholder, the nominee receives the sum assured along with the applicable accrued bonuses, if any. Such policies come with flexible premium payment options - level premium, limited premium or single premium - but the policy remains active for the whole life. Part of premium goes into providing protection while the rest of it builds cash value. There are unit-linked wholelife insurance policies also. Some policies come with additional benefits such as paying the premium on behalf of the policyholder.
"If a 40-year-old male opts for HDFC Long Life Protection Option plan, he needs to pay only Rs 7,055 per month and in case the policyholder gets diagnosed with a terminal illness the claim will be paid by the insurer even before the death of the policyholder. Also in case of a permanent disability to the life insured all future premiums will be paid by the insurance company," says Santosh Agarwal, Chief Business Officer, Life Insurance, Policybazaar.com.
Wholelife insurance as a legacy product
Although there are various ways to build a legacy for your kin, most people traditionally go for real estate. But, property is an illiquid asset and in the absence of a proper will, bear the risk of getting stuck in succession disputes. It is subject to wealth tax and income tax too. One can invest in equities also, but it is only meant for people with risk-taking abilities.
Wholelife insurance, on the other hand, is the simplest way of accumulating a good corpus for the next generation slowly and gradually with no tax implications. "Whole life insurance offers a combination of features and benefits that differentiate it from most other financial products. It leaves a tax-free inheritance for your children (policy nominees) in addition to your existing assets. Alternatively, if you have designated existing assets for one heir but also want to provide for another heir, whole life insurance is the answer," says Naval Goel, CEO & Founder of PolicyX.com.
Some wholelife policies can help you secure your retirement in which you will have guaranteed monthly income along with the death cover. "At the time of maturity the policyholder can choose and avail the maturity benefit as a lumpsum amount at one go or regular income at specific intervals," says Agarwal of Policybazaar.com. However, it is advisable to buy this policy with the primary purpose of building a legacy for your children because accrued bonuses boost the death cover significantly over a long period. "If you buy a policy at the age of 30 years with premium payment term of 15 years, and die at 80 years, the policy will have accrued bonuses of 50 years. If you calculate the IRR of total premium paid against the death cover and the bonuses, it will come out to be 6-7 per cent," says Shailesh Kumar, Co-Founder at Insurance Samadhan.
Besides, the policyholder has the power of nomination till the last day of life. "Nominee doesn't have to be your family member. You can change your nominee anytime you want and make someone who is taking care of you in your old age," he says.
The premium that you pay for the wholelife insurance enjoys tax exemption under section 80-C of the Income Tax Act. Moreover, the maturity benefit to the policyholder or the payout paid to the nominee after the death of the policyholder is also tax free under the Section 10(10D) of Income Tax Act, 1961.
Surrender, withdrawal and loan facility
If you have bought a traditional wholelife plan with a limited premium payment option, surrender is possible only after the policy has acquired a surrender value. A policy acquires surrender value after premiums for full three years have been paid to the insurer. "Albeit there will be a surrender charge applicable which will depend on the product terms and conditions," says Bharat Kalsi, Chief Financial Officer, Bajaj Allianz Life.
"In case of unit-linked wholelife, one can surrender a policy after five years without any charge. One can also opt for partial withdrawals. In Bajaj Allianz Life LongLife Goal, one can opt for any number of partial withdrawals without any charge," he says.
The policyholder can also take loan against the surrender value of the policy.
Should you prefer wholelife over term plan
Although wholelife insurance gives some benefit of a term plan, financial experts say it does not replace the need for having a pure term plan. Pure term plans give you highest life coverage at cheapest premium, but if you outlive the policy term, there will be no payout unlike whole life insurance which covers you for the entire life.
"Both the plans have different objectives and are meant to meet distinct financial goals. Term insurance plan would provide financial assistance to the dependents whereas the whole insurance plan would provide coverage for the entire life (up to 100 years of age). Hence, the choice of the plan depends on one's suitability and financial needs," says Rakesh Goyal, Director, Probus Insurance, Insurtech Broking Company.
As far as investment is concerned, the returns on these plans in non-linked categories often fail to beat inflation. However, people in highest income tax bracket may find it suitable as a debt equivalent investment option due to 80-C benefit and tax-free return. But if you are in lower income tax bracket and do not want exposure in equities, you may find a combination of a pure term plan and investment into small savings scheme like PPF a good alternative. Besides, new generation ULIPs are highly cost effective and give similar tax benefits.