Covered For Life?

Whole life insurance policies may not give you much benefits while you’re alive, but there are several kinds on offer. Sift through them,and you could find the perfect one for you. But you’ve got to understand the nuances in order to choose the right one, says Najaf Ishrati

Sep 13, 2005,
ET Personal Finance

INSURANCE products come in various shapes and sizes. One common category is the whole life scheme, which grants protection for the entire duration of life. Traditionally, participating in this scheme meant paying regular annual premiums until death, after which the sum assured would be paid out.
The policyholder would not receive any benefit as there is no payment on `maturity’ or survival’. I n a c apsule, t he whole life product was a very basic policy, easy to swallow, granting extended cover at reasonable rates of premium throughout life. If only the insurance companies also believed in keeping things simple, investors would not be sweating it out with their calculators right now.
The mutations and combinations of the whole life policy that exist in the market today make it difficult for consumers to compare and decide on which one suits them. Some come with profits, some without, most have a maturity age; some with incalculable GSVs, or what the company’s call guaranteed surrender values; and yet others are either unit or equity-linked. Options to take up limited payment schemes are also on offer. However, for the smart and the alert, this chaos presents a fine opportunity to select the scheme that is tailor-made for them.
Whole life policies offer more variety than term policies, when it comes to the age of the insured. Even a newborn is eligible for this policy, with three companies offering insurance to toddlers. Entry ages for others range between 12 and 20 years. The maximum entry age sees a range of between 50 and 70 years across companies. About half the companies that offer this product, maintain an entry cut-off age of 60.
When one looks at whole life policies, one assumes risk cover until death, whenever it may be. However, there are only four companies today that provide this cover. The others either do not provide this extended cover at all, or have in place a compulsory maturity option, at ages ranging from 80 to 85.
Of these, it is possible to find a company or two, which would stop providing risk cover after the age of 70 and would just return the policy fund after that. All this changes the nature of the whole life policy to a “cum endowment” policy, including the element of savings, to that of pure risk. However, the amount of savings that is guaranteed is something policyholders must look out for, as the rate offered may be lesser than a banks savings account.
A policyholder may choose the premium paying term here, where he could either sign up for a single premium whole life, (HDFC, Birla), pay premium for a limited term and yet enjoy lifelong protection (Sanmar, Birla, Metlife) or continue paying premiums until death, (Max NY, Birla)
The point at which these schemes start to differ is when it comes to calculating their premiums, with other variables remaining constant. An example of a healthy 35-yearold male is taken, with a sum assured of Rs 5 lakh and a premium paying term of 20 years, wherever applicable.
Otherwise, the maximum term was used to calculate the premiums. The difference in the premium amount between various policies is mind blowing, and could give rise to a lot of confusion. Exploring what exactly they make your money do, can solve the mystery behind these differences.
While the average premium for a 20-year term was Rs 21,905, the minimum recorded was Rs 8,205 (MetLife) and a maximum of Rs 47,364 (Birla). There is a reason for this vast difference. In the case of MetLife, the sum assured of Rs 5 lakh was the maximum possible death or maturity benefit, which was guaranteed.
Now, in the case of the Birla fund, the largest guaranteed death benefit is of Rs 20,07,996 at age 75. Of course, by then, the investor would have paid Rs 18,94,560, but that is another matter. The non-guaranteed portion is left to the imagination, with the company investing its proceeds in the market.
However, taking the example further, Rs 9,03,51,899 would be the death benefit at age 99, if the fund grew at an annual rate of 10%. It’s now up to the investor, as to whether he sees Rs 20 lakh or Rs 9 crore.
This is the reason insurance companies have a problem comparing schemes on the basis of the sum assured, and would much rather use the assumed maturity value instead. It is the investor who has to ask the question: what if the fund ends up with a 10% negative return in year 3 and then another 6% in year 7? What happens then, to his maturity value?
In the premiums to end of term, or till death category, three companies prominently display their wares. LIC, with a maximum premium paying term of 40 years or till age 80, whichever is earlier, has a premium of Rs 14,083 for the 35-year-old male. Max New York Life accepts premiums till death and offers the sum assured only on death or surrender value benefits on quitting, maintaining the cheapest annual premium rate of Rs 5,985.
Aviva has a twist in its scheme. At any time, during the tenure, you could stop paying your premiums and convert your scheme into a fully paid up one, and the cover would remain at the cost of the units held in balance. This balance would be periodically reduced, and on attaining zero value, the policy would lapse. Choose carefully.