Whole Life Insurance: Why It May Not Be A Good Idea

Whole life insurance is a type of insurance that provides you coverage for your entire life. A portion of the premiums is built into a cash value which grows and is guaranteed. On the death of the policyholder, the beneficiaries get a guaranteed death benefit. Premiums need to be paid for the entire lifetime of the insured or a fixed term. 

Whole life insurance is a type of permanent life insurance that offers coverage for your entire life, as long as premiums are paid. It features fixed premiums, meaning the amount stays the same throughout the policyholder’s lifetime. A portion of the premiums builds a cash value, which grows over time and can be borrowed against or used to pay future premiums.

Features Of Whole Life Insurance Plans 

Whole life insurance is an option for individuals who are looking for lifelong financial security, and at the same time also want an additional savings component. It is particularly beneficial for those who want to leave a financial legacy for their dependents. 

“This can also be used as a tax-efficient wealth transfer tool. Unlike term insurance, which provides coverage for a fixed period and only pays out if the policyholder passes away during that time, whole life insurance guarantees a payout whenever the policyholder dies. However, this added benefit comes at a much higher cost,” Rakesh Goyal, director, Probus.  

One of the biggest pros of such an insurance policy is the guaranteed death benefit. This ensures financial security for the policyholder’s family. Additionally, part of the premium goes into a cash value account that grows over time, which can be accessed through loans or withdrawals. 

Also, such policies come with tax benefits and the premiums paid are eligible for deductions under Section 80C of the Income Tax Act, up to Rs 1.5 lakh per year, under the old tax regime. Policyholders can also take tax-free loans against the cash value. 

A Good Proposition, But Not A Wise Investment 

One of the most significant drawbacks of such a policy is its high cost. Premiums could be five to 10 times higher than term insurance with an equivalent coverage amount. “This makes it less accessible for individuals who need substantial coverage but have budget constraints. Additionally, while the cash value component grows over time, its returns are typically lower compared to other investment options,” says Goyal. 

There is another drawback. “The life cover in whole life plans is not as comprehensive as term insurance, which offers 100 per cent pure protection, making it a better choice if your primary goal is full coverage,” says Sameep Singh, Product Head of Investment at Policybazaar. Term insurance along with mutual funds can thus prove to be a better option. 

Furthermore, such insurance also requires a long-term commitment, and policyholders who stop paying premiums early may end up receiving little to no benefit. “Also, borrowing against the policy’s cash value reduces the death benefit unless the loan is repaid, which can impact the financial security of dependents,” says Goyal.