Financial security through life insurance coverage and wealth creation through long-term investments are the two main aspects of comprehensive financial planning. Balancing protection and long-term financial growth are key to successful financial planning. Whole life insurance is a unique product that offers lifelong coverage and an investment component. This blend of protection and wealth-building makes whole life insurance attractive for those seeking long-term financial security and wealth creation.
What is whole life insurance?
Whole life insurance is a unique type of life insurance product offered by insurance companies that blends the traditional aspects of insurance protection with opportunities for long-term wealth creation. Unlike pure-term life insurance, whole life insurance does not offer life cover for a limited term. Instead, it offers lifelong coverage and includes a cash value component that grows over time. Whole life insurance offers the dual benefit of protection and savings that help in risk management and wealth building.
Two main components of whole life insurance
- Death benefit
Whole life insurance is also known as permanent life insurance as it comes with a compelling feature of life cover for a whole life. This guaranteed death benefit ensures that beneficiaries receive a predetermined amount (sum assured) upon the unfortunate demise of the policyholder. This ensures peace of mind and financial security for the family or loved ones. The death benefit can be of significant financial support to beneficiaries, helping them cover expenses such as children’s education costs, home loans, and other obligations. This guaranteed payout ensures wealth preservation and transfer to the next generation effectively, contributing to long-term wealth creation and financial stability.
- Cash value accumulation
The cash value component is a distinctive feature of whole life insurance. Part of the policy’s premium is directed towards a cash value account, which grows over time on a tax-deferred basis, accumulating interest and dividends. The policyholder can access this cash value through loans or withdrawals when they face a liquidity crunch. The cash value can grow significantly and help in building a substantial corpus over the long term. Long-term wealth created through whole life insurance investment can be utilized to meet various needs, such as funding children’s higher education, investing in retirement income, or purchasing a dream home.
How does whole life insurance work?
Whole life insurance is a type of life insurance that provides life coverage for the insured’s entire lifetime and also invests part of the premium for long-term wealth creation. Here is an illustration to help you understand the concept of whole life insurance.
Let us say Mr. Ahuja, aged 30, has purchased a whole-life insurance cover (for up to 100 years) with a death benefit of INR 50,00,000 for an annual premium of 20,000. A part of the premium is directed for life cover, and the remaining is directed to a cash value account to build wealth over time. Let’s say the cash value is INR 20 lakhs in 25 years. Mr. Ahuja can decide to take a loan against the cash value of his daughter’s marriage or repay the home loan. Unfortunately, if Mr. Ahuja dies at the age of 70 years, the beneficiary in the policy would be compensated with a death benefit that includes the sum assured and the accumulated cash value. If we assume INR 40 lakhs as cash value, the beneficiary will get a guaranteed payout of INR 90 lakhs (INR 50 lakhs + INR 40 Lakhs). However, withdrawals from the cash value or the loans are adjusted at the time of paying the death benefit.
Whole life insurance plans come in many types such as limited payment whole life policy, single premium whole life policy, joint whole life policy, variable whole life policy, etc. You can also customise the whole life insurance policy by adding the various riders such as critical illness cover, accidental and disability cover, etc.
Tax implications of whole life insurance
The premium paid for whole life insurance is eligible for tax deduction under Section 80C of the Income Tax Act, 1961 for up to INR 1.5 lakhs per financial year. Payouts from the policy can also be exempt from tax under Section 10 (10D) of the IT Act if certain conditions are met.
Conclusion
To conclude, whole life insurance stands out as a comprehensive financial product that offers lifelong protection while ensuring you meet your wealth creation goals. This dual benefit allows policyholders to plan for financial security and potential growth, making it a versatile tool for long-term financial planning.