Whole life plan helps create wealth, meet financial goals

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Whole life plan helps create wealth, meet financial goals
Posted on : Aug 10, 2011, 04.47am IST

A 'whole of life' (WoL) insurance plan provides insurance cover for the entire lifespan of a policyholder. This feature distinguishes it from other life insurance products that have fixed term of coverage. Since, in WoL plans, the policyholder pays the premium for a longer tenure, insurance companies add 'endowment' or 'savings' element to the risk cover to ensure there is a cash value attached to the premiums paid.

The 'endowment' or the 'savings' element can be incorporated either on a traditional or a unit-linked platform. In India, WoL plans on a traditional 'with-profits' platform are more common. This means premiums are payable throughout the lifetime of the policyholder and the policy benefits are given to the nominee on the death of the policyholder.

The premium remains constant during the entire term and the policyholder gets life-long cover. The policy benefits are defined in guaranteed terms, like the sum assured and the vested bonuses the company declares based on its performance.

The bonuses are expressed as a percentage of the sum assured and declared at the end of each financial year. So, the investment risk is not transferred to the client and the insurer bears the risk of guarantees. In short, a WoL plan on a traditional platform gives policyholders an insurance cover for the entire life (usually 100 years) and, on their death, cash value to the nominees.

WoL plans on a unit-linked platform work in a similar fashion except the fund value is given as the cash value. WoL is a large and mature segment in developed insurance markets. This has led to several innovations that provide ease and flexibility to a policyholder.

Indian insurance companies have adapted these features while designing WoL plans. They include incorporating an endowment platform on WoL; flexibility in paying premiums at different frequencies; option of paying premium for a limited term; additional riders, etc. Endowment plans are also designed with extended risk cover till death beyond the maturity of the policy.

In other words, WoL plans offer a combination of both living (endowment) and death benefits. For example, if a 30-year-old male opts for a limited premium paying WoL plan for a 30-year term and sum assured of Rs 20 lakh, he would stop paying premium when he turns 60 but he would have the life cover up to 100 years. WoL plans are often compared with pure term plans. Pure term plan provides risk cover to a policyholder for a fixed tenure and there isn't a 'savings' element.

There are scenarios where WoL might be more suitable for a customer than term plan. Term plans are cheap and provide substantial cover early in life. However, let's take the case of a 25-year-old who has bought a term plan for 20 years.

The insurance cover will end when he turns 45. Considering the increasing life expectancy in India and the longer productive years of the workforce, he might have 30 years of life ahead of him of which at least 20 would be productive with a fairly high remuneration (considering his experience).

He might have met his key financial goals but a few new goals might have since emerged as part of his retirement planning. At 45, if he were to plan to secure these, he will find the premium to be high, the medical examination onerous and will struggle to find a plan that meets his needs.

A WoL bought at the right time would have met his needs at that stage. Ideally, one should have a term plan for fixed tenure at an early age and a WoL plan with a lower risk cover that one can increase over the years. Also, WoL plans are ideal for estate planning - individuals who wish to pass on their estate in an unencumbered manner to their legal heirs - as it helps in the creation of wealth.