When it comes to making sure your loved ones are protected in the event of your passing, there's nothing quite like a whole life insurance policy. A whole life insurance policy provides coverage for your entire life and offers a lot of benefits that other types of policies do not.
Types of Whole Life Insurance Policies
Participating Whole Life
Participating whole life insurance allows the policy owner to participate in the insurance company’s profits. Although these payments are not guaranteed, most companies have rarely skipped a year of distribution.
Universal Whole Life
Universal Whole Life Insurance is a permanent policy that offers lifelong coverage and a savings component. With a guaranteed death benefit and a cash value that grows at a fixed interest rate, the policyholder can use the savings for premiums, withdrawals, or loans.
Variable Whole Life
It has a guaranteed minimum death benefit and the cash value can be invested in different investment options. Policyholders can adjust their investments, but higher fees and premiums come with the investment component. Those who cannot commit to long-term payments may not find it suitable.
How Whole Life Insurance Differs from Term Life Insurance
While whole life and term life insurance policies provide life insurance coverage, the two differ in several ways:
Whole Life Insurance
- Lifetime coverage
- Fixed premiums
- Savings component
Term Life Insurance
- Coverage for specified term
- Premiums may increase at renewal
- No savings component
Investment Component of Whole Life Insurance
The investment component of a whole life insurance policy is also known as the cash value component. It is a savings account within the policy where a portion of the premiums paid by the policyholder are invested by the insurance company. The cash value component grows over time and accrues interest on a tax-deferred basis. The investment component of whole life insurance is often used as a long-term savings and investment strategy for individuals who want to provide for their families after their death while also building wealth over time.
Risk of Surrendering Whole Life Policy
If you want to surrender your policy, whether you’ve found a better deal or can’t afford your life insurance premiums. Now you’re wondering when you should surrender the policy. The good news is there are generally no restrictions on when you can surrender a life insurance policy – as long as you’ve made it through the surrender period. This period varies by policy and could be a couple of years to over 5 to 15 years.
However, most policies require you to pay surrender fees when surrendering a policy. A surrender fee is a amount that the life insurance company charges for you to cancel your insurance contract early. Surrender charges often decrease over the policy’s life, with some disappearing entirely after a specific time. That means the longer you wait to surrender the policy, the less you’ll likely pay in surrender fees.
Tax Benefits of Whole Life Insurance Policy
A Whole Life Insurance Policy provides various tax benefits under the Income Tax Act 1961.
Premiums paid towards Whole Life Insurance Policy are eligible for a deduction under Section 80C of the Income Tax Act. However subject to certain conditions.
The maturity proceeds from the ULIP are tax-free under Section 10D of the Income Tax Act. However subject to certain conditions.