Taking Cover. Is whole life insurance worthwhile?

Have you been saying ‘no’ to a term life insurance policy because you fear surviving the term and not getting any benefit? Endowment plans, which come with an option of whole life cover that extends till the age of 100, are an option. Many insurance players, including HDFC Life, SBI Life, Max Life and LIC, offer such policies.

For those not convinced of a pure risk cover, here’s a brief on whole life plans.

Whole life insurance plans are policies that cover an individual for his whole life. But, unlike term policies which are plain-vanilla insurance, whole life plans do not come as standalone risk covers. They are bundled with endowment policies.

Endowment policies are combo products which offer both savings and insurance.

While endowment policies traditionally offer insurance cover up to only 70-75 years of age, in cases where there is a whole life option, the policy gives insurance coverage till 100 years.

The benefit of a whole life endowment policy is that policyholders get the sum assured amount twice — first during the end of the endowment term and then, either at the time of death or maturity at 100 years. For instance, consider an individual of age 40, who has taken an endowment policy of sum assured ₹50 lakh for a term of 25 years with a whole life cover. If he survives the next 25 years, he will get the sum assured of ₹50 lakh and bonuses, if any (if it is a participating plan), once he completes 65. Thereafter, if the policyholder passes away, say at 80, his nominee will be paid ₹50 lakh — the sum assured, after which the policy will terminate. If, however, the individual survives to celebrate his 100{+t}{+h} birthday, ₹50 lakh will be paid to him then.

HDFC Life’s Sampoorn Samridhi Plus, SBI Life’s Shubh Nivesh, Max Life Whole Life Super and LIC’s New Jeevan Anand are some prominent whole life endowment plans.

The other important aspect about endowment plans is that as they come from the basket of traditional policies, the surrender value is very low. If you are not able to continue paying the premium and surrender it within three years from the time you took the policy, you will not get even a penny back. Surrendering at the end of the third year will fetch you 30 per cent of total premium paid. If you do so between the fourth and the seventh year, you will get 50 per cent of total premium paid. The percentage of surrender value increases with time and becomes 70 per cent after 21 years.

Endowment policies come with two options — participating plans (called ‘par’ plans) and non-participating (non-par) plans. In participating plans, the policyholder gets a share of the company’s profits, which are declared as ‘bonus’ and are a percentage of sum assured.

The bonus can either be simple reversionary or compound reversionary. A simple reversionary bonus is calculated on the sum assured and there is no compounding benefit. The latter is calculated on the sum assured and all cumulative bonuses of the past year. The regular bonus apart, some insurers also give a terminal bonus at the end of the policy term which is like a loyalty gift to the policyholder for staying with the company.

LIC is the most generous when it comes to paying bonus. For its new Jeevan Anand, LIC offered bonus of 4.7 per cent in 2013-14. HDFC Life’s Sampoorn Samridhi paid bonus of 3 per cent. However, note that bonuses are not guaranteed benefits. It may not be prudent to base your decision on historical bonuses.

If you are 35, for a whole life endowment policy of sum assured ₹5 lakh, you will have to cough up ₹20,000-25,000 as annual premium. On the other hand, a term cover for double the sum assured of ₹10 lakh for the next 40 years will cost ₹2,000.

Endowment policies should deliver earth-breaking returns for the price they ask, but no. These policies invest largely in government bonds and other securities which generate poor returns. They are ultra safe, but returns adjusted for inflation are small. Returns from endowments policies depend largely on the bonus that insurance companies declare. But given that it is usually only 3-4 per cent, investors may not gain much. Some insurers such as HDFC Life offer a ‘guaranteed’ benefit in their endowment policies to boost returns which is a shade better compared to others.

On a gross return of 8 per cent, the IRR of whole life endowment policies works out to 4.5-5.5 per cent, because of their high cost structure. But, 8 per cent is in itself a tough target, given their traditional investment portfolio.

Whole life endowment plans give you twice the sum assured and pay back more than what you have shelled out as premium, but are relatively expensive. Most life insurers today offer cover for 50-55 years in their term insurance. So, consider a term insurance policy.

If you intend to leave a legacy for your children or dear ones, invest that amount elsewhere — in a PPF or an equity-based mutual fund and write a will making them your legal heirs.