How Does Whole Life Insurance Work?

by SMCIB on Tuesday, 25 April 2023

How Does Whole Life Insurance Work?

Life insurance is basically a small investment that you have to make to protect your family and yourself from a huge financial burden that’s potentially looming in the future. It can be a useful tool for securing the financial future of your loved ones during unfortunate circumstances. And, if you want to effectively shield them against life’s unpredictability till the very end, whole life insurance might just be the right choice.

Whole life insurance can be equated to buying a permanent asset, like a home. It stays with you forever and builds value over time. It’s your best bet if you want long-term guaranteed financial protection for your family and leave behind a useful parting gift for them.

In this article, we will explore the concept of whole life insurance and learn how it works.

What is Whole Life Insurance?

Whole life insurance (or permanent life insurance) offers lifelong coverage and guarantees financial stability for you and your loved ones. It is like a trusted ally that stands by your side, come what may. The basic goal of whole life insurance is to provide lifelong financial security to your loved ones.

Here are the benefits it offers -

Death Benefit
The insurer pays the cover amount to your nominee if you pass away during the policy term. The policy term lasts for your entire life, usually till when you turn 99-100 years old.

Maturity Benefit
If you reach a certain age (usually 99-100), i.e. outlive the policy term, you will get you a maturity benefit.

Survival Benefit
Some whole life insurance plans may also give you a survival benefit if you outlive the premium payment term, i.e., the time span wherein you’re supposed to finish off paying the premiums.


How Does Whole Life Insurance Work?

Here’s a quick guide to buying whole life insurance -

1️⃣ Deciding the cover amount

When it comes to buying a whole life insurance policy, one of the most critical decisions is determining the correct cover amount. It is a delicate balancing act that requires careful consideration. This is because having too little coverage can be just as bad as having none at all.

To ensure that your family is adequately protected, you need to take into account various factors such as -

  • Immediate/short-term financial obligations like school fees, monthly bills, etc.
  • Long-term goals like children’s higher education, weddings, etc.
  • Outstanding loans and liabilities.

To arrive at the right cover amount, assess your finances, including your assets and existing life covers. Once you have determined the required cover amount, you should also factor in inflation.

2️⃣ Customising your policy

You mustn’t have a ‘one-size-fits-all’ approach when buying whole life insurance. The policy should be tailored to your and your family’s unique requirements, so you can ensure adequate protection, always.

To make sure that the policy is curated to suit your needs, you can customise it. Here are a few customisation options available with whole life insurance -

  • Limited Pay Option
    It offers you the flexibility to pay off premiums in a shorter duration. By opting for it, you can finish off your premium payment liability while you’re still earning. This allows you to enjoy lifelong coverage without the burden of continuous premium payments.

  • Premium Payment Frequency
    You have the freedom to choose the frequency of your premium payments. You can pay them monthly, quarterly, half-yearly, or yearly - depending on your convenience and finances.

  • Riders
    You can enhance the coverage of your base whole life insurance plan by opting for riders or add-ons. They provide additional coverage for specific financial risks, at a certain extra cost.

    Here are some riders that are commonly available with whole life insurance plans -
    Critical Illness rider
    Accidental Death rider
    Accidental Disability rider
    Hospital Care rider
    Surgical Care rider
    Waiver of Premium due to Disability rider
    Waiver of Premium due to Critical Illness Rider

Note: This is an indicative list of riders. The list may vary - depending on the insurer and the product.

For example, Hari loves outdoor activities such as hiking and rock climbing. He purchases a whole life insurance policy with a sum assured of Rs. 90 lakhs and also buys an Accidental Disability Rider with a cover amount of Rs. 10 lakhs. One day, while on a weekend trip with friends, Hari undergoes a severe fall and is left permanently disabled. Hari receives a lump sum payment of Rs. 10 lakhs from his rider. This amount will help him cover his medical expenses and other financial needs.

3️⃣ Paying premiums

You pay a premium for the policy in exchange for the financial protection it offers. It is determined by various factors like your cover amount, premium payment duration, the riders you choose, etc. After you finalise your policy, you pay the premium and the underwriting process begins. If your application is approved, your policy is issued and this ensures lifelong financial protection for you and your loved ones.

4️⃣ Paying the renewal premium every year

Just like a plant that needs consistent watering to grow, your whole life insurance policy needs regular premium payments to stay active. Missing a premium payment may cause your policy to lapse, leaving your family without the intended financial protection.

Pro tip – Set up a standing instruction on your bank account instead of a credit or debit card. This ensures that your premiums are paid on time, as credit and debit cards have expiry dates that could result in missed payments.


How Are The Benefits Paid Out Under Whole Life Insurance?

Here’s how whole life insurance pays out benefits under different circumstances -

? In Case You Pass Away During the Policy Term

When you purchase a whole life insurance policy, you secure lifelong protection for your loved ones. In case of your unfortunate demise, while the policy is active, your nominee will receive a death benefit. This benefit is equivalent to the sum assured you selected at the time of purchase.

Pro Tip – It is always wise to keep your nominee updated and informed about the policy details and claims process to ensure a hassle-free experience during such an emotionally difficult time.

? In Case You Survive the Policy Term

A whole life insurance policy gives you a guaranteed payout as a maturity benefit when you reach the specified age, typically 99-100 years. This is equivalent to the sum assured under your plan.

In Case You Survive The Premium Payment Term

Some whole life insurance policies may also give you a survival benefit in the form of periodic payments at the end of the premium payment term. This provides an additional layer of financial security for you and your loved ones.

For example:
Paul, a 35-year-old man, lives with his wife and 5-year-old son. He wants to secure their future and leave a financial legacy for them. So he purchases a whole life insurance policy with a sum assured of Rs. 80 lakhs. He appoints his wife as the nominee. As per the policy, the insurer will pay the sum assured as the death benefit/maturity benefit, depending on the circumstances.

This is how Paul’s policy will pay out -

  • Scenario 1: Paul passes away during the policy term
    Say Paul passes away due to an illness at the age of 45, while the policy is still active. His wife receives the death benefit of Rs. 80 lakhs and the policy terminates afterwards. The payout provides her with financial security during such a difficult time.

  • Scenario 2: Paul survives the policy term
    Say Paul survives the policy term and celebrates his 99th birthday. He receives a maturity benefit of Rs. 80 lakhs and the policy terminates afterwards.


How Do You Discontinue a Whole Life Insurance Policy?

You may want to quit your whole life insurance policy for various reasons. This may include - finding a new policy that is more cost-friendly, a change in your financial goals, no longer needing the coverage, etc. This is known as surrendering the policy, and you will be entitled to receive a surrender value for the same. However, the surrender value is only available if you have paid premiums for a minimum of 2 policy years, and this duration may differ among insurers.

To conclude,

So that is how a Whole Life Plan works - it offers lifelong coverage to you and your family members, along with an opportunity to grow your wealth. Its customisable features allow you to tailor it to meet your financial goals and protect your loved ones. With a whole life insurance plan, you can rest assured that your financial future and your family's well-being are in good hands.

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