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All Questions Answered About Whole life Insurance

Q-1 Is whole life insurance a good investment /asset?

Ans- The answer to this question largely depends upon an individual’s needs and goals. Some people prefer to invest in term life insurance and invest the difference in whole life insurance policy.

Others believe that whole life insurance is designed to be an asset that grows in value. It can be used as a long-term investment vehicle that provides continuous, stable growth along with tax advantages and a death benefit. It also provides significant liquidity, as you can borrow against it or withdraw funds as well.

Q-2 How whole life insurance works?

Ans- The way whole life insurance works is determined by the premium you pay. The premium is allocated by the life insurance company in three ways:

  • A portion of the premium is used for the cost of the life insurance or the death benefits.
  • A portion of the premium goes towards the administrative cost of managing your policy.
  • The final portion of the premium goes towards the savings or cash value accumulation portion of your policy.

The premium you pay can remain the same and is guaranteed for the life of the insurance policy, or can be more flexible.

The cash value increases because of the regular payment of your premium and also because of interest or investment earnings.

Q-3 Does whole life insurance policy require medical tests?

Ans- Indeed, some life insurance policies don’t require you to take a medical test, but offer relatively small payouts. Under such policies, if you die in the first year or two, your beneficiary will only get the money you paid in premiums, plus some interest or a small percentage of the total death benefit.

On the other hand, the policies which require a medical examination, offer increasing payout every year the policy is in force and offer full death benefits.

So it is advisable to opt for the policy that requires you to answer health questions and take a medical exam.

Q-4 How much will the whole life insurance cost?

Ans– The life insurance company determines how much your whole life insurance premium will cost. It depends upon the following considerations:

  • The amount of the death benefit you choose
  • Your age
  • The state of your health

Permanent life insurance premiums are less expensive to buy when you are younger and become increasingly more expensive as you age.

Q-5 What are whole life insurance dividends?

Ans-Dividends represent a portion of the insurance company’s profits that are paid to policyholders. Many whole life insurance companies invest some part the premium received from the policyholders, the profit on such investments is distributed back to the policyholders as a dividend.

Q-6 Are whole life insurance dividends taxable?

Ans- As per Section 10(10D) of the Income Tax Act, 2016, the amount of sum assured plus any bonus/dividend (i.e. the policy proceeds) paid on maturity or surrender of policy or on death of the insured are completely tax-free for the receiver subject to certain conditions:-

  • As per section 10(10D) in case of a life insurance policy issued after 1.4.2003 but on or before 31.3.2012 if the premium payable in any year exceeds 20% of the actual sum assured, then the policy proceeds/dividends would be taxable in the hands of the insured. As per section 10(10D) read with the explanation to Section 80C, ‘Actual Sum Assured’ simply means the sum assured which is least in all the policy years and does not include any bonus amount which is to be received over and above the assured amount. It does not include any premiums which are to be returned to the policyholder.
  • For policies issued on or after 1.4.2012, the above-mentioned limit of 20% has been changed to 10%.

In case the insured suffers from severe disability or disease as specified by the Income Tax Act and rules and his/her policy was issued on or after 1.4.2013, then for them, the limit of 10% will be increased to 15%.

In case the premium payable in any year exceeds the prescribed percentage i.e. 10%, 15% or 20% of actual sum assured, as described in the preceding points, then the whole proceeds from the policy would get taxed in the year of receipt. However, in case of death of the insured, where his nominees receive the policy proceeds the same shall be tax-free in the hands of the nominee(s) even if premium paid in any year crossed the prescribed percentage of sum assured.

Q-7 Is whole life insurance premiums tax deductible?

Ans– Yes, whole life insurance premiums are tax deductible under section 80C of the Income Tax Act, 2016 subject to certain conditions:

  • Deductions are only allowed for Premiums only up to 20% of the Sum Assured if the amount of Premium paid in a particular financial year for a policy is in excess of 20% of the ‘Actual Sum Assured’ for the policies issued before 1.4.2012.
  • For policies issued on or after 1.4.2012, the above-mentioned limit of 20% has been changed to 10%.
  • Maximum tax deduction allowed under section 80C is ₹ 1,50,000.

Q-8 How does whole life insurance work as an investment?

Ans- Whole life policy provides protection to the policyholder throughout his life until you take your last breath. Also, it has a cash value component which continues to grow over time. In such a way it works as an investment.

Q-9 Is whole life insurance a good option for retirement planning?

Ans- No doubt, whole life insurance can be used as a part of their retirement planning strategy. But various other retirement solutions available in the market are much more attractive than whole life insurance such as mutual funds, Public Provident Fund (PPF), National Pension Scheme (NPS), direct equity etc. They are less expensive and provide better returns and safety of fund.

Q-10 Should you buy whole life insurance for a child?

Ans- Parents can take whole life insurance policy for their children so that it will last for their entire life. They can get it for lower premium owing to the fact that the child will be young and healthy. The premium will remain fixed even if he falls sick in future. Also, a good corpus can be generated from the cash value of the policy by starting at an early age, which can be used by the child later in his life.

However, it is argued that, various other options are available in the market which may provide better protection to the children. So, it is essential to consult a properly licensed and credentialed Certified Financial Planner before taking any decision.

Varun Baid

Varun Baid

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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