A Cover For Your Life

FINANCIAL PLANNING As the headline suggests, whole life policies provide life coverage and also offer some returns which make it a better option compared to term policies. But it comes at a higher cost PALL AVI M U L AY ET INTELLIGENCE GROUP  TERM insurance policies are recommended to meet one's insurance needs. However, they are unpopular largely because the periodic premium payments over the life of the policy do not earn any financial return if the policyholder survives through the policy term. Moreover, it is available for specific term ranging from one year to 30 years. This leaves out senior citizens just when the need for financial security is the highest. To address these shortcomings of term insurance policies, the industry has designed Whole Life Insurance.      Whole life insurance combines a term policy with an investment component. Like term policies, it is actually meant to secure financial future of one's family in the absence of the breadwinner. But the similarity ends there. These polices offer life coverage till very old age or even till 100 years unlike term policies which typically cover the working life of the policy holder which ends at 58 or 60 years of age (it differs from policy to policy). Also, along with the sum assured, additional returns are paid to the nominee in case of the death of the policyholder. One more feature that differentiates a whole life policy from a term policy is that it does not lapse even though it remains unclaimed during the policy term. Once the policyholder lives up to the specified age till which the cover is provided, maturity proceeds are paid to him/her.      The maturity proceeds or survival benefits differ from policy to policy. Some policies offer either recurring bonus or terminal bonus or both. Some policies offer guaranteed returns every year. Few companies also provide whole life unit linked plans or whole life with additional benefits. In short, the varieties of whole life insurance policies with various options of premium payment-single, limited period or regular-are made available in the market to attract customers. Such well-catered whole life insurance seems to be a good deal compared to term insurance policies.      But there are no free lunches in this world. The premium for these policies is far higher than for term policies. The premium of any term policy with sum assured of Rs 5 lakh and policy term of 25 years would be around Rs 2,000 per annum for a 30-year-old male. Whole life policies with sum assured of Rs 5 lakh will cost around Rs 11,800 per annum to a policyholder of same age.      In whole life insurance one is paying not only for insurance coverage for an extended period, but also for the investment portion. So the moot question is if the promised return is worth the extra cost?  OPTION I: For example, Mr A, 30-year-old person, purchases LIC's pure whole life insurance policy. He pays an annual premium of Rs 11,852 for life cover of Rs 5 lakh. He is supposed to pay this premium till the age of 80. If Mr A survives till he attains 80, the maturity proceeds will be around Rs 36 lakh (The calculation of maturity proceeds is based on the bonus and additional bonus rates announced for the year 2007-08. However, it keeps changing every year. The bonus rate depends on the duration of the policy and it is higher for longer term policies. Hence the actual realisation at the time of claim settlement or on maturity may differ from the amount mentioned here).  OPTION II: Let's assume a case wherein Mr A uses the same amount, i.e., Rs 11,852 (per annum) to buy term insurance and invest the rest in PPF. The annual premium for the term insurance policy of Rs 5 lakh will be around Rs 2,000 per annum. He invests the rest, i.e., Rs 9,852 in PPF, then the accumulated investment will be around Rs 64 lakh at the age of 80 (adjusted for higher insurance premium in later years). However, he will not avail any life coverage after the age of 65 and has the option of  investing the entire amount, i.e., Rs 11,852, in PPF annually. In an ideal situation Mr A may survive till 80. But in case he dies at the age of 67, his nominee will receive almost Rs 21 lakh as a claim settlement of whole life policy (it is the summation of accumulated bonus and terminal bonus, if any, along with sum assured).      If he had opted for option II the accumulated investment would be around Rs 22 lakh without life cover, higher than the returns earned on whole life policy. Critics of selfinvestment however say that it's tough for individuals to maintain an investment discipline all through their working lives. But this may not be too tough for salaried professionals; they can raise the voluntary contribution to their EPF account by an equivalent proportion.      So it is up to an investor whether to be financially disciplined and earn better returns by purchasing low-cost term life insurance and investing the difference in other investment avenues. Or else go for forced saving through whole life insurance policy to accumulate some money for the heirs with the life coverage till the very old age.  EXTRA COVER  Whole life insurance combines a term policy with an investment component  Unlike term policy it earns some financial returns on the premium paid during the policy term  Premiums are higher than the premium paid for term plans  Various options of premium payment-regular, limited period and single premium-are available  Few companies offer whole life policies with additional benefits like guaranteed survival benefit during policy years. These policies are available with additional riders