Ch. 14: Things To Consider Before Buying Whole Life Insurance Policy

Given the long-term impact a Whole Life Insurance Policy has on your and your family’s comfort and financial stability - it is important that you get everything right. From deciding the sum assured to calculating the bonuses, and other benefits the policy will pay, from picking the right policy to selecting the features - ensure you make careful choices.

Here are some things you should keep in mind before buying a Whole Life Insurance Policy -

Unlike term insurance policies that cover you only for a specific term, the main purpose behind buying a whole life insurance policy is to ensure you are able to provide enough funds to your family whenever you pass away.
For instance, it could be to achieve the goal of passing on a secure amount to your family in the form of a tax free legacy, or you want to factor funds for a certain member in your family who may remain dependent on you for their lifetime.

Sum assured is the amount (besides the accrued bonuses, if any) the insurance company will pay you if you survive till the end of the policy duration, or to your nominee if you pass away while the policy is active.

The sum assured you choose should be enough to support your family financially in your absence. To ensure your family is always adequately covered, you should take into account inflation for at least 20 years while calculating the cover amount. So, if you think Rs. 20 Lakhs cover will be adequate for your family today, then a cover of Rs. 44 Lakhs would be sufficient for them 20 years from now - if you factor in inflation of 6%.

Premiums of a Whole Life Insurance plan will be pretty high, especially when compared to Term Life Insurance, of course because of the nature and duration of benefits it offers. Hence, the next thing you’ll have to evaluate is whether you’ll be able to pay the premiums every year. The Whole Life Insurance premiums should fit well into your regular expenses - so, go ahead only if you can afford to pay the premiums every year for the entire tenure of your policy.

Ensure you are aware of the exact return on investment you are generating from this investment. You can ask the insurance company or your financial advisor to share the IRR for the investment you are making.

The Internal Rate of Return (IRR) is a financial metric that compares the returns from two different cash flow streams, i.e. your inflows and outflows. The metric basically calculates and tells you how profitable your investment will be. The higher the IRR, the better your investment is.

In fact, ideally you must learn to calculate this yourself. There are enough calculators available online where you can enter your outflow and inflow to calculate IRR.

You need to be comfortable with this return, and evaluate it against the purpose you are making this investment. For instance, it's absolutely fine if the returns are not matching with other aggressive investments in the market, as long as this matches your goal to protect the capital before it generates returns.

While you continue investing in a whole life insurance policy, there might be a situation where you want to discontinue the same. Maybe your family isn’t financially dependent on you anymore. Or maybe you want to just stop paying premiums for multiple reasons.

You are making a long term commitment and hence knowing the disadvantages of dropping off should be clear. You should know the amount of money you would get and the amount of money you would lose when you surrender your policy at a particular juncture, say 3 years or 5 or 10 years from the policy payment term.

The next thing you should check is whether a limited pay option is available with the Whole Life Policy you’re planning to purchase. A limited pay option will ensure you don’t have to pay the premiums of the policy for the entire policy duration, i.e., 100 years. You can finish paying off all the premiums early in life and get the payment liability off your chest quickly.

Besides reviewing the features and other details of the mobile phone, you would also check if the brand of the phone is good or not, right? Similarly, it is important to review the past performance of the insurance company you’re going to buy the Whole Life plan from. You should check the returns and bonuses given by the insurer to the existing policyholders in the past, their history of claim settlement, any information you can get about their services from other customers.

A guaranteed benefit includes the sum assured and accrued bonus you’ll certainly receive.

Non-guaranteed benefits are variable benefits. Whether you receive these benefits or not will depend on the future performance of the insurance company, economic conditions, etc.

Always demand a benefit illustration from your financial advisor. You can know how much guaranteed and non-guaranteed benefits you will receive from the benefit illustration provided to you. So, go through this benefit illustration and check if the benefits will be sufficient for you and your family in the future or not.

Say you’re looking to buy a new smartphone under Rs. 20,000. Now, would you go online, search for ‘mobiles under 20,000’ and then buy the very first option that appears on your screen? Or would you do some research,

compare features of at least 3 to 4 phones, like the storage, battery life, camera, display, etc., and then decide which phone to buy? You’ll obviously research, compare, check if the phone fits your needs or not - and then make the purchase, right?

Similarly, before buying a Whole Life Insurance Policy, it is important that you do a detailed research and compare the various options available as well as the insurance companies that are selling those policies. You must compare the benefits, features, and limitations of the insurance policies - the returns, bonuses, past performance of the insurance companies, etc., and then, make an informed decision.

Similar to choosing the premium payment term, you can also choose how frequently you want to pay your whole life insurance policy premiums. Based on your convenience, you can choose from the annual, semi-annual, quarterly, and monthly premium payment options. If you think you won’t be able to pay the premium amount annually, you can choose the other payment options.

Important Note - Irrespective of the type of payment frequency you choose, make sure you set up auto-debit or standing instructions on your bank account so that your premiums are paid on time and your policy doesn’t lapse.

Not only can you choose how frequently you want to pay your premiums, but you can also choose the frequency with which you want to receive the maturity or survival benefit under your policy. Based on your and your family’s requirements, you can decide if you want to receive the benefit annually or monthly.

However, the option of getting the benefits in instalments is not available with all Whole Life Insurance plans. So, if you want you and your nominee to receive the benefits in instalments, ensure you check if this provision is available with the policy you’re planning to buy.

The free look period is a period during which you can go through the policy document, look at the terms and conditions, check the exclusions, limitations, etc. of the policy you just purchased. During this period, if you're not satisfied or come across conditions or limitations that you feel are not right for you, you can return the policy to the insurance company without any penalty or cancellation charges. So, make sure you check the length and the terms and conditions of the free look period provided under the policy you’re going to purchase.

The grace period and revival period come into the picture when you miss a premium payment. The grace period is an additional time period you get to catch up on your premiums. If you fail to pay your premiums even in the grace period, your policy will lapse, i.e., all benefits under the policy will cease. After this, the insurance company will provide a revival period during which you can get your lapsed policy back. The conditions for both the grace period and revival period will vary across insurers - so, ensure you check and understand this properly before making the purchase.

Most insurance companies allow you to opt for add-ons or additional benefits, i.e., riders along with your whole life insurance plan. These riders will offer a payout on the happening of a specific event. For instance, in case of accidental death, the Accidental Death Rider will pay an additional sum of money to your family.

The riders you can choose with a Whole Life Plan will vary from insurer to insurer. Here are some common riders most insurance companies offer -

• Accidental Death Rider
• Accidental Disability Rider
• Critical Illness Rider
• Hospital Care Rider
• Surgical Care Rider
• Waiver of Premium due to Disability Rider
• Waiver of Premium due to Critical Illness Rider

Options for riders will be different for different products and insurers. You can opt for these riders with your Whole Life Insurance Policy at nominal premium rates.

You will also be required to identify a nominee (or multiple nominees) who will receive the claim amount in the event of your death. You can choose any family member to be your nominee - your spouse, children, or even your parents or your siblings.

Remember, a whole life plan is a lifelong insurance protection plan that provides a cover for your entire life and also helps you safeguard your family’s financial future. However, doing all the calculations, comparison, research, etc. by yourself could get tedious considering the complexity of the product. To ensure you don’t go wrong, you can seek help or talk to a good financial advisor who can guide you and help you make informed decisions.

So, these are a few things you must keep in mind before purchasing a Whole Life Insurance Policy. Remember, a little extra effort, some calculations, and proper research will go a long way in ensuring there are not many hassles for you and your family later on.