A term plan's premium is lower than that of a wholelife plan.
Budget 2023 has proposed that, starting from April 1, income from insurance policies (other than Ulips) whose premium (or aggregate premium for several policies) exceeds Rs 5 lakh in a year will be taxed at slab rate.
Death benefit, though, will remain tax exempt.
Many financial experts expect wholelife plans (including those with a premium exceeding Rs 5 lakh) to be sold aggressively in the aftermath of this change.
How do they work?
Wholelife policies combine protection with saving.
"They provide cover till age 90 to 100 years, provided all the premiums are paid. The premium payment term typically ranges between 15 and 25 years," says Karthik Raman, chief marketing officer and head-products, Ageas Federal Life Insurance.
The payout comes as a death benefit or as maturity amount.
"If the insured passes away before 99 or 100, the nominee gets the sum assured. But if he survives the policy term, he gets a large maturity amount," says Dinesh Bhoi, assistant vice president-life insurance, Anand Rathi Insurance Brokers.
Tool for wealth transfer
The survival benefit from traditional policies having premium above Rs 5 lakh will be taxed at slab rate from the next financial year.
"In the case of wholelife plans, most people may not live till the age of 99 or 100. The death benefit payout to the nominees will be tax exempt," says Deepesh Raghaw, a Securities and Exchange Board of India registered investment advisor and founder, PersonalFinancePlan.
High net worth individuals may use these plans as a tax-efficient vehicle to transfer wealth to the next generation.
These plans offer a few advantages.
"Their premium remains constant throughout the policy term and the sum assured is also guaranteed," says Indraneel Chatterjee, co-founder, RenewBuy.
Bhoi says you can also limit the premium payment term till your earning age and avail of Section 80C tax benefit on the premium paid.
Low returns
Wholelife plans offer coverage till 99 or 100.
"Life coverage till such an advanced age means a higher mortality charge, which affects the returns from these plans," says Raghaw. Traditional policies invest the bulk of their corpus in debt instruments. Hence, their returns rarely exceed 5.5-6 per cent. "If I invest for 40-50 years, I would want a higher return," says Raghaw.
A premature exit from them results in a high penalty.
Checks you must run
If you are buying a non-participating plan, calculate (or get an expert to do so) its internal rate of return.
If it is a participating plan, get a sense of the bonus it has offered in previous years.
"The insurer should have a claim settlement ratio of above 95 per cent," says Bhoi.
Some wholelife plans offer both lump-sum and regular payouts. Raman suggests opting for a plan whose payout pattern suits your needs.
Chatterjee adds that the buyer should also be sure about his ability to pay the premiums.
Who should go for it?
A person who wants to enjoy the survival benefit if s/he is alive but pass on the death benefit to her/his children may go for these plans.
"Wholelife plans are suitable for leaving a legacy for the next generation as they guarantee payment of death benefit to the beneficiaries as a tax-free lump-sum amount," says Chatterjee.
Interest rates may decline in 40-50 years.
"A person who wants to lock into the return offered currently by a non-participating plan may opt for one," says Raghaw.
Flexible alternative
Instead of a wholelife plan, you may opt for a term plan that offers life cover till the age of 100.
Such a plan will also enable you to pass on tax-free death benefit to the family.
A term plan's premium is lower than that of a wholelife plan.
The money saved can be invested in equity mutual funds.
"Even with a 10 per cent taxation rate, equity MFs are likely to offer better returns than the tax-free return from a wholelife plan," says Raghaw.
Equity MFs will also offer liquidity. The caveat is that you must not get perturbed by their volatility.
You can also stop paying the premium on a term plan anytime without adverse consequences.
