Don't ignore this insurance option

Traditionally, whole-life insurance has been frowned upon  because of its inability to return money to the person who makes the premium payments. The money only comes back at age 80 or death, whichever is earlier. This, however, has been more due to the warped understanding of life cover in India that lays more emphasis on the returns rather than the cover for the dependant family.

We need to look at whole-life policies as a special tool for special circumstances. The basic difference between a term and a whole-life policy is that the latter combines a term policy with an investment component. There are two such situations that merit mention here.

First, whole-life polices are very useful in estate planning, especially in countries with high estate duties (tax levied on inter-generational estate transfer) like the US. Even in India, with no estate duties, this plan will allow a neat transfer of resources to the next generation without stamp duties and the problems associated with the transfer of assets. Remember, term plans, as such, do not carry any terminal value and most endowment plans terminate at age 65, taking away the wealth transfer function.

Second, a whole-life policy is a very strategic insurance option for those starting families at a later date, or suddenly getting dependants at age 40 to 50. For example, take a case where the parents die, leaving the children dependent on grandparents.

A term plan will terminate at age 65 and does not help in a situation where there are dependants even after age of 65 and personal assets are not big enough to see the family through. Hence, even though the whole life plan is more expensive than a term plan, it may be the only option for an individual who has dependants late in life.

One issue that such an individual could face with a policy like this is that he may not be able to pay premiums after retiring at age 60. For such people, Max New York Life's Whole Life Plan allows for using the bonus declared to pay future premiums, or to add to the cover.

LIC's Jeevan Anand allows for higher contributions in the earlier years and then no premiums during the last part of the policy. This does not erode the capital value of the policy, but uses the higher income years (up to 60) to pay premiums for the lower income years (post 60).

Before you purchase a whole-life policy, what you need to keep in mind is that the real value of such a policy starts building up after 12-14 years. If you exit before this period, it would mean that the money invested has been used inefficiently. Remember, you have to be sure of your reasons for choosing this plan because this is essentially a long-term product that works best after you have passed on.

Tax kick: Same as for endowment policy.
 

Additional inputs: Sunil Dhawan