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Whole life insurance policy - an estate planning tool

What is estate planning? Can a whole life insurance policy be an estate planning tool? Get answers to your questions right here.

Kairav Shah

04 Dec 2008

Estate planning refers to the process of building a bridge from one generation to the next one by passing on one's assets.

In India, the whole concept of estate planning is perceived as being a rich-man's exercise, for those who have enough cash, property or valuables, to leave it behind for their loved ones. The middle class can barely make ends meet, right? And the less said about the impoverished in this regard, the better. But this is not the case...

Fact of the matter is, estate planning is essential, regardless of your economic standing. First of all, if you audit all your assets, you are bound to be surprised at its size. The mistake most of us make is in recognizing our assets, which in turn, our final estate. Your estate should consists of cash, property, income from property, shares, jewelry, insurance policies, provident fund, recurring and fixed deposits, any other.

In this instance, let's look at insurance as an estate planning tool.

Off the bat, let me make it clear - there are better avenues for estate planning than insurance products. Having said that, the majority of us have "invested" in insurance products as some sort of a legacy to our near and dear ones.

insurance policies, such as whole life policies, act as vital assets that you can leave behind for legal heirs and/or nominees. They represent large corpus of funds that can be of immense use to your next of kin/nominee/legal heir after you have passed on. Plus, you have the feeling of contentment that comes from doing what is right for them.

Whole life insurance plans provide insurance throughout your life or up to a specified pre-determined age. The maximum age of coverage differs from insurer to insurer. The maximum age of expiry for a whole life policy could be as late as your 99th birthday. The sum assured is paid out to the nominee on your expiry, OR to you, if you survive till the pre-determined age. Whole life policy payouts include the sum assured (i.e. death benefit) as well as bonuses accrued in the course of the policy tenure. The whole life policy works on the principle that you are not entitled to any payout during your lifetime. That is, there is no survival benefit to the policy holder. It represents value accrued through out your life, bequeathed to your legal heir/nominee.

But here's a surprise! If you were to survive till the almost-impossibly high pre-determined age, congratulations, you have earned the right to keep the payout! In this event, consider the payout as a gift for the long life you have managed to lead. A very nice birthday present indeed.

As an estate planning tool, the whole life policy is the best in the insurance stable.

But, (and it is a big but)...a whole life policy will work as an estate planning tool only if you keep to some conditions:

  • The whole life policy you choose should have the least investment component in its premium break-up. Finding this is easy - compare whole life premiums across insurers. The insurer giving you the smallest premium quote for the same sum assured and tenure will have the least investment component.
Why do we say this?

An insurance product is not an ideal investment vehicle. Returns from insurance plans rarely beat inflation, never mind positive year-on-year rates of return. Therefore, why would you want to pay extra premium towards an investment that is going to be a bad investment when even basic investment or savings avenues such as the public provident fund (8% annualized return, guaranteed by the government of India)
  • Buy the whole life policy that also has the longest term
Remember, you haven't bought a whole life plan for your benefit - it is primarily an estate for your heirs. The longer the term of the policy, the lower will be the premium. i.e. maximum benefit at the least cost.
  • Also buy the whole life policy that allows you limited premium payment facility
Insurers offer whole life plans that allow you to pay premiums for just the first twenty years of a 50-year plan. This means that you have sewn up payment on your plan during your working years, AND you remain covered long after you have retired.

While estate planning, think twice before purchasing any asset or any policy. When it comes to the insurance component of your estate, your focus should be on lending a helping hand to your legal heirs. At the end of a productive life, you can pass on in the comfortable thought that you have left your dear ones in financial comfort.