How does a whole life insurance policy work?

In whole life insurance, the policy is purchased against a premium payment which can be a lump sum, monthly, or yearly. If one purchases a unit-linked whole insurance policy, a certain amount is kept aside as the sum assured while the remaining is invested in any investment fund.

Basis the market performance, the insurer reviews the policy and assesses if the value of the policy is equivalent to the cost of the insurance. In case the investment fund is not performing well, the insurer either asks the insured to reduce the sum assured or increase the regular contribution.

Types of whole life insurance

Broadly categorized into two, whole life insurance is present in the following:
  1. Non-participating whole life insurance: This has a face premium and face amount throughout your life. The advantages include fixed costs and low out-of-pocket premium payments. It also does not offer dividends.
  2. Participating whole life insurance: The defining feature of a whole life policy is that it pays dividends. The dividends are excess earnings in the form of investments, savings from expenses, and others. If the dividends are paid, it reduces the premium payment or will be accumulated to attract interest at a specified rate.
Under the above-mentioned categories, the whole life insurance policies are subdivided into the following:
  1. Level Premium: Premiums are to be paid until the insured is alive. The initial premiums are used for insurance protection costs while the later premiums contribute to any shortfalls in protection costs.
  2. Limited Payment: Premiums are to be paid for a limited period, but protection is for a lifetime and therefore are higher.
  3. Single-Premium: Premium is paid in a lump sum and is more of an investment insurance product.
  4. Indeterminate Premium: Provides the option to adjust the premiums based on current earnings, expenses, and mortality

Who should opt for a whole life insurance policy?

It is suitable for individuals who
  • Have made investments towards post-retirement and looking for avenues to invest
  • Own an estate and plan to bequeath the estate and transfer the wealth
  • Have just started working and are able to make premium payments for a considerable time
Whole life insurance provides cover for life apart from offering assured coverage, regular payments, and tax sops. Along with this, whole life policy offers loan options and benefits your dependents.

Learn more about online life insurance plans

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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