One of the sales pitches distributors and agents use for selling whole-life policies is that they will help you create an inheritance for your loved ones. But pause before you give in to that view.
First, let’s understand what whole-life policies are. These policies cease only once you die, so the proceeds go to your nominees. However, the journey to getting this sum assured is not all that simple.
One, it is a very-long-term policy, and you should buy only if you are sure you will be able to pay the premiums throughout your life. Consider the fact that life expectancy is increasing in India. While the agent will get commissions till your lifetime, you will have this additional outgo in your senior years. So considering your cash flow situation is extremely important before you lock into such a policy.
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Two, the cost may be an issue. The cost of life insurance is higher with a whole life policy because of the extended coverage period, which lasts up to 99-100 years of age. Says Kesarwani of Zenith Finserve: “Whole-life policies have high premiums as they have insurance and investment components combined, and they are very long-term products. Thus, you should check if you really need a whole-life policy and would be in a position to pay premiums throughout the term before buying it.”
Three, it is never advisable to combine, insurance, investment, and inheritance planning. It is better to keep them separate unless you are certain that the combined product is cost-effective and suitable for your needs.
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The basic purpose of life insurance is risk coverage, not the creation of assets for dependents to inherit. For inheritance, one may invest in various other assets that can grow in value at a much higher rate than what whole-life insurance can provide. If you do need to protect your dependants, who you expect to remain so throughout your life, you must buy term insurance, which is cheaper, and invest the rest in high-growth instruments since you know that it is for the next generation and not for yourself.
Building an inheritance using a whole-life policy is a mere ploy to make commissions for distributors, and may not necessarily work for you.