Life Insurance

Components of Whole Life Insurance

by SMCIB on Tuesday, 25 April 2023

Components of Whole Life Insurance

The fact that life is utterly unpredictable is a harsh reality and it's impossible to ascertain what tomorrow will bring. Although this may not be a comfortable topic to discuss, it highlights the critical significance of having a financial backup plan to ensure your and your family’s financial well-being.

You can do this with a life insurance policy. While there are various life insurance policies offered by insurance companies, whole life insurance stands out due to its exceptional advantage - lifelong coverage. In essence, it is a two-in-one package - providing financial protection for your loved ones in the event of your passing, while also serving as a long-term savings tool. It lets you leave behind a keepsake, a legacy for generations to come, giving them the assurance of a secure and comfortable life.

Now, let's dive deeper into the details of whole life insurance!
 

How Does Whole Life Insurance Work?

As the name suggests, a whole life insurance policy covers you for your entire lifetime.

  • It provides lifelong protection for your loved ones. In the unfortunate event of your passing away during the policy period, the policy will pay out the cover amount as the death benefit to your nominee.

  • If you reach a certain age (usually 99 or 100 years), you will receive a maturity benefit.

  • Depending on the insurer, a survival benefit may also be paid out when you complete all premium payments.

In fact, Whole Life Insurance is also known as a permanent life insurance policy – as it provides continuous coverage until you are 99-100 years of age.
 

What are the Key Components of a Whole Life Insurance Policy?

To gain a comprehensive understanding of a whole life insurance policy, it is important to familiarise yourself with its key components. So, let's delve deeper into them –

1️⃣ Premium

One of the distinctive features of a whole life insurance policy is its fixed premium structure, which stays consistent throughout the policy duration. To keep the policy active and to ensure that its benefits remain intact, it is essential to pay the premiums on time.

Whole life insurance policies offer flexible options for paying premiums -

  • Single-Pay Option
    You can choose this option to pay the entire premium amount as a lump sum in one shot at the time of policy purchase. For example, Jawahar is a businessman who has gained significant profits over the years. He purchases a whole life insurance policy with a cover amount of Rs. 70 lakhs and opts for the single-pay option. He pays the entire premium payment upfront when he purchases the policy and can now enjoy lifelong coverage without any more premium payments.

     
  • Limited-Pay Option
    This option allows you to pay your premiums faster and in larger instalments over a limited number of years. For example, Samantha, a bank employee, purchases a whole life insurance policy with a sum assured of Rs. 40 lakhs and opts for the limited-pay option. She decides to pay her premiums in larger instalments over a period of 20 years, and she will enjoy the benefits of her policy for the rest of her life.

     
  • Regular-Pay Option
    Under this option, you need to make regular premium payments until the end of the policy term.

The premium payment frequency ultimately depends on your financial situation and goals. Regardless of the payment option you choose, one thing you need to do is pay the premiums on time to avoid any gaps or lapses in your coverage. 

 

2️⃣ Death Benefit

The death benefit refers to the fixed amount of money that is paid out to your nominee if you pass away during the policy tenure. It provides financial support to your loved ones at the time they need it the most, be it to fund your children’s education or wedding, pay off outstanding debts, etc.

3️⃣ Maturity Benefit

A whole life insurance policy provides a fixed sum of money as the maturity benefit when the policy attains maturity. The maturity date is specified in the policy document when buying the policy. For whole life policies, it is generally 99 years. If you survive the entire policy term, you become eligible for this payout. It is a valuable component of a whole life insurance policy, as it provides an added layer of financial security.

For example, Gaurav is a married man with two children. He intends to secure the financial stability of his family and also leave a legacy behind for his children. He thus decides to invest in a whole life insurance policy with a sum assured of Rs. 50 lakhs and chooses his wife as the nominee. He will be covered for 99 years.

Let’s see how the benefits will be paid out -

Death Benefit - In case Gaurav passes away during the policy term, his wife will receive a death benefit of Rs. 50 lakhs. This will ensure that his family is financially secure in case of his untimely demise.

Maturity Benefit - If Gaurav outlives the policy term, he will receive a maturity benefit of Rs. 50 lakhs. This amount can be used for medical bills, everyday expenses, fund his descendants’ education or weddings, etc.

 

4️⃣ Survival Benefit

In addition to the death benefit and the maturity benefit, some whole life insurance policies also provide an additional payout known as the survival benefit. You will receive it at the end of the premium-paying term, i.e., after you have completed your entire premium payment.

Depending on the insurer, the survival benefit may be -

  • A percentage of the cover amount.
  • A separate sum decided by the insurer.

Let’s take Gaurav’s example again and say that the premium payment duration under his plan is 15 years. Let’s assume that a survival benefit is payable under his plan, which is equal to 4% of the cover amount. It will be paid once Gaurav finishes paying the premiums.

So, Survival Benefit = 4% of 50 Lakhs
                                = Rs 2 Lakhs

Gaurav will receive Rs 2 Lakhs as the survival benefit once his premium payment term of 15 years is over.

5️⃣ Loan Facility

You may have certain goals that can get quite heavy on your pocket, whether it’s sending your kids abroad for education, buying a house, etc. And, you may wish to take a loan for the same. Did you know that you can use a whole life insurance policy as collateral to secure a loan? The loan facility under the policy opens up after it has been in force for a continuous period of 3 years or more from the day of policy purchase. Depending on your policy type, this buffer period may vary across insurers.

6️⃣ Cash Value

Another unique feature of a whole life insurance policy is that it generates a cash value. As you continue to pay your premiums, the cash value of the policy grows over time. This means that the longer the policy has been in force and the more premiums paid, the greater the cash value will be. This can be used in a number of ways, which includes paying your future premiums, borrowing money against it, etc.

For example,

Heena is an entrepreneur who purchases a whole life insurance policy with a sum assured of Rs. 50 lakhs. As she continues to pay her premiums on time, the cash value of her policy continues to grow. After 10 years, Heena requires funds to expand her business. She informs her insurer and withdraws some cash value accumulated under her whole life insurance policy.

 

To conclude,

A Whole Life Insurance policy offers lifelong coverage, providing a sense of financial security for your loved ones. It not only guarantees a death benefit upon your passing but also offers a maturity benefit if you outlive the policy term. Along with that, the policy offers other features like a loan facility, cash value, etc., which make it a valuable asset.

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