The Hindu Business Line : Whole life polices: Best of both worlds

EVER THOUGHT of how important you are to your family? Or where your death will leave them? An insurance policy can be useful. However, what if nothing happens and you want to gain from the premiums paid? This is when a whole life insurance policy comes in handy.

Whole life policies provide protection throughout life. If the policyholder dies, it provides a financial cushion for the kith and kin. A simple whole life policy requires you to pay regular premiums throughout your life. An assured sum is paid out either on death or survival till a pre-determined age. Whole life policies expire at age 100. A few expire early. For instance, ING Vysya Life's whole life policy ends at 85 years. That is, on survival up to age 85, you will get back the sum assured and accrued bonuses.

Whole life vs term

The primary factors that differentiate a whole life policy from a term policy are the savings element, the policy term, bonus eligibility, loan eligibility and premium payments.

A term policy provides pure life cover. A whole life policy has an element of savings built into it.

You pay higher premiums for a whole life policy, compared to a term policy, so that a part of it is invested. For a term cover, you only pay for the risk of death.

The higher premiums are invested and the returns flow back in the form of bonuses if it is a participating whole life policy. Bonuses are not declared for a term policy.

You can take a loan from your whole life policy as it is a part of your savings. Term policies do not offer loans.

When the policy expires, you get back your savings in the form of sum assured. In a term plan, you do not get any survival benefits as you pay only for life risk. It expires with the term. Some policies return the premiums paid. But the premiums for these policies are higher than plain term plans.

A term policy provides cover for a shorter term, normally till age 70 or 75. A whole life policy protects you till 100.

The choice of a policy depends on your requirement. If you are looking only for life cover, and have other alternative investment plans, then a term plan will suffice. The choice between whole life and endowment plan will depend on whether you want to leave money for your family, or use it during your lifetime. If your intention is to save for a specific reason, say, retirement, child's education or marriage, then opt for an endowment plan.

Whole life vs endowment

Both whole life and endowment plans work on similar lines — both have a savings element attached to them and, hence, are eligible for bonuses and loans. The difference here again lies in the duration. An endowment plan allows you to enjoy the benefits of your savings. In the case of whole life polices you leave a legacy behind for your loved ones.

Blurring differences

The differences between various life insurance products are now blurring with the entry of private players and a host of fusion products to choose from. For instance, Tata AIG's "Mahalife" and ING Vysya's "Fullfilling life" are products that not only cover you throughout your life but also make lump sum payouts at periodic intervals during your lifetime. Moreover you pay premiums for a limited period. The following are a few plans:

Tata AIG requires you to pay premiums only for 12 years. You get guaranteed cash payments annually throughout your life. This is in addition to cash bonus payments that are not guaranteed and start from the sixth year on. Over and above this, you get sum assured on death or at age 100.

ING Vysya's policy is structured on the lines of a money back policy. It also allows you to choose the premium payment term among 16, 20 and 24 years. You get 20 per cent of the sum assured for the first three quarters of the premium payment term and 40 per cent of the sum assured at the end of the premium payment term. This is over and above the final sum assured that will be paid out on death and non-guaranteed bonuses.

LIC's Jeevan Anand is a whole life-cum-endowment plan, where the sum assured plus bonuses are paid at the end of the premium payment term but life cover continues for the whole life. A sum equivalent to the sum assured is paid to the beneficiary in addition to the earlier payout if death occurs after the endowment period. Bonuses do not accumulate after this period.

Birla Sun Life and Aviva give you the flexibility to choose your investment options according to the risk preferences. You also have the option to change your investment mix at any point of time.

Max New York offers an in-built terminal illness benefit. If a policyholder is diagnosed for a terminal illness and certified by the doctor that death can occur within six months, 50 per cent of the sum assured is immediately paid. The rest is paid on death.

Bonus payments

The policies differ when it comes to the mode of bonus payment, type of accumulation and the structuring. This can have a significant impact on the returns. The following are a few points that you should consider before choosing a policy:

You can choose a "with profits"' policy or a "without profits" policy as offered by LIC or Metlife India. The premium for a "with profit" policy is higher than that for a "without profit" policy as the extra premiums are used for investment.

The structuring of bonus payments is another significant aspect of a life insurance policy. For instance, ING Vysya declares bonus on sum assured if it is reversionary (payout is made on expiry of the policy or on death) and on premiums paid for cash bonuses. Mostly, bonuses are declared on the sum assured.

LIC pays a simple reversionary bonus, that is, the bonus declared does not earn interest. Max New York offers the widest choice when it comes to bonus payments. Though you have to pay premiums throughout the policy life, you can adjust the bonus payments towards future premiums, or purchase additional term insurance, or make additions to your policy with your bonus payments. You can also allow it to accumulate and earn an interest on it. But bonuses are declared on the basic sum assured.

Suitability

If you want to take a policy on your child, then Tata AIG's plan appears to be attractive due to the short premium payment term, life long cover and regular guaranteed payouts throughout the lifetime. When taken at a young age, it could be beneficial. When it comes to bonus payment options, Max New York scores over others. If you are looking at lumpsum payouts at regular intervals to meet other important expenses along with a life cover, then you can go for ING Vysya's whole life policy.

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