Close

Buy a Life Insurance Plan in a few clicks

Now you can buy life insurance plan online.

Kotak e-Invest

Insurance and Investment in one plan.

Kotak e-Term

Protect your family's financial future.

Kotak Guaranteed Fortune Builder

A plan that offers guaranteed income for your future goals.

Kotak T.U.L.I.P

A plan that works like a term plan, and Earns like ULIP Plan.

Kotak Assured Savings Plan

A plan that offer guaranteed returns and financial protection for your family.

Kotak Assured Pension

A plan that offers immediate or deferred stream of income

Kotak Lifetime Income Plan

Retirement years are the golden years of life.

Kotak Guaranteed Savings Plan

A plan that offers long term savings and life cover.

Close

Get a Call

Enter your contact details below and we will get in touch with you at the earliest.

  • Select your Query

Thank you

Our representative will get in touch with you at the earliest.

Whole Life Insurance Definition: How it Works, With Examples

Whole life insurance, as its name goes, refers to an insurance plan which covers you for a lifetime. Here's all you need to know about whole life insurance.

  • 5,548 Views | Updated on: Mar 19, 2024

Life insurance is a crucial financial tool that provides protection and economic security for your loved ones in the event of death of the policyholder. There are a plethora of options in the market, especially when it comes to investing in life insurance.

Key takeaways

  • Whole life insurance is an insurance plan that covers you for a lifetime.
  • The central aspect of whole life insurance is that your premium remains constant throughout the policy term.
  • Whole life insurance ensures the payout of a death benefit to beneficiaries in exchange for consistent premium payments.
  • Policyholders can enhance the cash value and acquire extra coverage by making payments beyond the scheduled premium.
  • Whole life insurance includes a cash value component.

When choosing from the available options, you must pick the one that gives you long-term benefits and fulfills all your requirements. One such plan available in the market is the whole life insurance policy.

What is a Whole Life Insurance Plan?

As the name goes, whole life insurance refers to an insurance plan that covers you for a lifetime. The maturity age for a whole life plan is about 100 years, and it comes with a maturity benefit. This is to imply that whole life insurance will give you the sum assured at either the time of death (death benefit) or it will give you the promised maturity benefit if you live up to 100 years.

Key Features of Whole Life Insurance Plan

Now that we have briefly examined the whole life insurance plan let us look at some of its key features.

  • One of the main features of a whole life plan is that your premium remains constant throughout the policy term. It is decided when you buy the policy initially and does not change afterward.
  • Once you have completed three years from the start of your life insurance policy, you can also take loans against the corpus you are creating.
  • Whole life insurance helps secure your loved ones’ future after you, as the sum assured provides help with various purposes, such as education, debt repayment, etc.
  • Along with everything else in a whole life plan, you can get the sum assured as a lump sum payout or as regular income. At the time of surrender, you can also get a cash value of the money in the policy.

How Whole Life Insurance Works?

  • Whole life insurance ensures the payout of a death benefit to beneficiaries in exchange for consistent premium payments. This policy incorporates a savings component, known as the “cash value,” and the death benefit.
  • The cash value accrues interest on a tax-deferred basis, and its growth is a crucial aspect of whole life insurance.
  • Policyholders can enhance the cash value by making payments beyond the scheduled premium and acquiring extra coverage, known as Paid-up Additions (PUA).
  • Additionally, dividends from the policy can be reinvested into the cash value, earning interest. Over time, the combined dividends and interest on the cash value exceed the premiums paid, providing a positive return on investment.
  • The cash value is a living benefit, allowing the policyholder to access it while the insured remains. These funds can be accessed through a withdrawal or a loan, with withdrawals tax-free up to the total premiums paid.

Uses of Whole Life Insurance

Unlike term life insurance, which provides coverage for a specified term, whole life insurance offers lifelong protection and various additional uses. Some of them are as follows:

Death Benefit

The death benefit is the amount paid out to beneficiaries upon the death of the insured. This tax-free lump sum can be used to cover funeral expenses, outstanding debts, and provide financial support for dependents. Whole life insurance ensures that these benefits are available whenever the insured passes away, regardless of age.

Tax Advantages

Whole life insurance offers several tax advantages. The death benefit is generally income-tax-free for beneficiaries. Additionally, the cash value growth is tax-deferred, meaning policyholders do not pay taxes on the earnings as long as the funds remain within the policy. Policy loans are also generally tax-free, providing flexibility in accessing funds without incurring tax liabilities.

Supplemental Retirement Income

In addition to providing a death benefit, the cash value in a whole life insurance policy can be tapped into during retirement. Policyholders can receive tax-efficient supplemental income by either withdrawing the cash value or taking out policy loans. This can be especially valuable for individuals looking to diversify their retirement income sources.

Did You Know?

In certain situations, individuals can use premium financing to fund whole life insurance policies, borrow money to pay the premiums, and use the policy’s cash value as collateral.

Is There Only One Type of Whole Life Insurance Policy?

You can find many variations within whole life insurance and choose from different types of whole life insurance plans. The variations are based on the premiums, tenure, and added benefits.

Participants Whole Life Insurance Policy

Under this type of plan, a face amount is mentioned on the policy that you will get as a sum assured. However, the insurer will invest from your end into the company, and you will get a bonus if any profit is made. All these things do not impact the premium. It is important to remember that the bonus will be added as and when the company earns a profit, which may not be every year.

Non-Participant Whole Life Plan

Here, the basics of the plan will remain the same with a face amount and premium. However, there is no investment and, therefore, no additional bonus.

Level Premium Whole Life Insurance

In such a plan, the premiums are paid till the policyholder is alive. With this type of coverage, premiums are thus guaranteed to remain the same throughout the contract.

Limited Premium Whole Life Insurance

The premium is paid only for a certain number of years - the first 15-20 years of the policy, and the benefits can be reaped lifelong. Limited premium whole life insurance is a good option as you can pay premiums while still working and have a steady flow of income. However, the premiums will likely be higher during the short payment period.

Single Premium Whole Life Insurance Plans

You can pay the premium all at once and will not have to worry about any more payments to come. The policy requires that the holder has access to a large sum of money upfront, meaning it’s not financially feasible for many individuals.

Indeterminate Premium Whole Life Insurance Policy

The premium is initially low and then increases after a specified period of time. The insurance company will charge a “current” premium based on its current estimate of investment earnings, mortality, and expense costs.

Whole Life Insurance vs. Term Life Insurance

Two primary categories emerge when considering life insurance options: Whole Life Insurance and Term Life Insurance. Each type has its own set of features, benefits, and drawbacks.

Aspects

Whole Life Insurance

Term Life Insurance

Coverage Duration

Lifelong coverage until death

Coverage for a specific term

Premiums

Higher premiums

Lower initial premiums that may increase at renewal

Investment Component

Includes a savings or investment component

Purely insurance coverage

Flexibility

Limited flexibility in premium payments

Flexible premium payment options

Surrender Value

Can surrender the policy for cash value

No surrender value in most cases

Use as Investment

Also considered a long-term investment tool

Not designed as an investment

Advantages and Disadvantages of Whole Life Insurance

Advantages

Whole life insurance is a comprehensive solution that combines life coverage with various unique advantages.

1. Cash Value Accumulation

Unlike term life insurance, whole-life policies include a cash value component that grows over time. The policyholder can access this cash value through withdrawals or loans. The growth is generally tax-deferred, providing an additional savings element.

2. Stable Premiums

Whole life insurance typically comes with fixed premiums, meaning the policyholder pays the same amount throughout the policy’s life. This predictability can be advantageous for budgeting, as it avoids unexpected premium increases.

3. Dividend Payments

Some whole life policies can receive dividends from the insurance company’s profits. Policyholders can receive these cash dividends, use them to reduce premiums, or reinvest them to enhance the policy’s cash value.

4. Estate Planning Benefits

Whole life insurance can be a valuable tool for estate planning. The death benefit is usually paid tax-free, providing a source of funds to cover estate taxes or pass on a financial legacy to heirs.

Disadvantages

While whole life insurance has its merits, examining the potential drawbacks of this type of coverage is essential.

1.Higher Premiums

One of the main drawbacks of whole life insurance is the cost. Premiums for whole life policies are typically higher than those for term life insurance. This can be a deterrent for individuals looking for more affordable coverage.

2.Limited Investment Returns

While the cash value in a whole life policy grows over time, the returns are generally lower than other investment options. Policyholders might find better investment opportunities elsewhere, such as in the stock market.

3.Complexity

Whole life insurance policies can be complex, with various components like cash value, dividends, and riders. Understanding the nuances of the policy may require financial literacy, and some policyholders may find it challenging to navigate the intricacies.

4.Opportunity Cost

The money used to pay premiums for a whole life policy could be invested in higher-return opportunities. For disciplined savers and investors, the returns from alternative investments might outweigh the benefits of a whole life policy.

5.Rigidity

Whole life insurance policies are less flexible than term life policies. Changing coverage amounts or adjusting premiums can be more challenging, making it less adaptable to changing financial circumstances.

What is the Difference Between Universal and Whole Life Insurance?

Choosing between Universal and Whole Life Insurance involves considering individual financial goals, risk tolerance, and preferences. Whole life insurance provides stability and predictability, making it suitable for those seeking a straightforward, long-term solution. On the other hand, universal life insurance offers flexibility and the potential for higher returns, appealing to individuals who want more control over their policy.

Aspect

Universal Life Insurance

Whole Life Insurance

Policy Duration

Flexible - Can be for a lifetime or a specified term

Lifetime coverage

Premiums

Flexible - Can be adjusted within certain limits

Fixed for the life of the policy

Cash Value

Accumulates over time, based on premiums and interest rates

Guaranteed to accumulate over time, often with dividends

Investment Component

Can include an investment element, allowing for potential growth

No separate investment component

Flexibility

Allows for adjustments in premiums, death benefits, and investment options

Limited flexibility, fixed terms, and benefits

Death Benefit

Can be adjusted based on policyholder’s needs and circumstances

Fixed and guaranteed, does not change over the life of the policy

Cost

Generally lower initial premiums, but can increase over time

Higher initial premiums, but remain constant throughout the policy’s life

Risk Tolerance

Suited for individuals comfortable with market-related risks

Suited for those seeking a conservative, stable investment approach

Examples of Whole Life Insurance

1 Meet Shreya Kapoor, a 35-year-old software engineer who wants to ensure the financial security of her family in case of her untimely demise. Shreya decided to opt for a whole life insurance policy with a coverage amount of ₹1 crore.

  • Premium and Payout: Shreya pays an annual premium of ₹1.5 lakhs for a policy that provides her with lifelong coverage. In the unfortunate event of her death, the policy guarantees a tax-free lump sum of ₹1 crore to her nominated beneficiaries.
  • Cash Value Accumulation: As Shreya continues to pay premiums, the policy accumulates cash value over the years. This cash value can be utilized by Shreya during her lifetime, either through withdrawals or policy loans, providing her with a financial safety net for unforeseen circumstances.
  • Tax Benefits: The death benefit received by Shreya’s beneficiaries is exempt from income tax. Additionally, the cash value growth is tax-deferred, offering her tax advantages while the policy is in force.

2 Raj Malhotra, a 40-year-old entrepreneur, is focused on building a substantial legacy for his family. To ensure financial stability for future generations, Raj chooses a whole life insurance policy with a coverage amount of ₹2 crores.

  • Premium and Payout: Raj pays an annual premium of ₹3 lakhs for a comprehensive policy that guarantees a tax-free lump sum of ₹2 crores to his loved ones in the event of his demise. This ensures that his family has the financial means to maintain their lifestyle and meet any outstanding obligations.
  • Cash Value Accumulation: The policy not only provides a substantial death benefit but also accumulates cash value over time. Raj can leverage this cash value for various financial needs, such as funding his children’s education or supplementing his retirement income.
  • Estate Planning: Raj sees the policy as an integral part of his estate planning. The ₹2 crore can be used to cover estate taxes, preventing the need to liquidate assets. This ensures a smooth transfer of wealth to his heirs.
  • Business Planning: As an entrepreneur, Raj recognizes the flexibility of whole life insurance. The policy can serve as a key asset in his business planning, offering liquidity through policy loans if needed.

Conclusion

Whole life insurance is a versatile financial tool, offering lifelong protection, a cash value component, and potential investment growth. While it may not suit everyone, individuals looking for a comprehensive approach to insurance and wealth accumulation may find whole life insurance a valuable part of their financial strategy. It is essential to carefully evaluate your financial goals and consult a financial advisor to determine if full life insurance aligns with your needs.

Investments are a crucial aspect of financial planning and must not be taken lightly! Therefore, it is recommended that you research and read as much as possible before making any decisions!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Kotak e-Term

Download Brochure

Features

  • Life Cover till 85 years for Life & Life Secure Option
  • 3 Payout Options
  • Special Rates for Women
  • Option to exit the policy with premium refund at the age of 60*
  • Special Rates for Non-Tobacco Users
  • Free Medical Check Up every 5th year**

Ref. No. KLI/22-23/E-BB/2435

T&C