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When Is Whole Life Insurance A Good Investment Strategy?

By Author: sidharthkapoor
Total Articles: 2

Life insurance is a simple proposition. You pay a regular premium to your life insurance company against which it offers you protection. While pure term plans, endowment policies and money-back plans come with a fixed policy term, certain types of life insurance, like whole life insurance policies, which also have an investment option provide cover until the insured’s lifetime. Let’s learn more about this policy.

What are whole life plans?
Whole life insurance policies, as the name suggests, are a type of life insurance that covers the policyholder for the entirety of their life. The premiums remain fixed throughout your life and you even get a certain ‘cash value’ on your policy after a certain number of years.

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Whole life insurance as an investment option
The primary objective of whole life insurance is to be a source of income for your dependents after your death. While the premiums are relatively higher than term plans, whole life plans do provide guaranteed returns. Part of your premium is put in a tax-sheltered investment account to generate these returns. Therefore, your gains are safe and impervious to market fluctuations. Moreover, you also get a guaranteed death benefit. You can also take loans against your policy.

When whole life insurance might be a good investment

Whole life insurance takes at least 15-20 years to generate desired returns. This is because in the early years of the policy, the fees and the cost of insurance use up a majority of your premium. It is only in the later years that more amounts are put in to investments. Thus, investing in a whole life insurance policy may not be a prudent idea for the elderly.

Younger people with kids, on the other hand, especially those in the higher income bracket - can use wholelife insurance to leave an inheritance behind. You can plan an estate, by creating an insurance trust that pays the estate taxes and leaves that to your heirs. However, the returns on these policies are moderate at best, and investing in them isn’t a great financial move, unless you are looking to get insured as well. There are various other financial instruments in the market that generate higher, inflation-adjusted returns than whole life plans.

Lastly, remember to compare whole life plan premiums, and read and understand the policy documents carefully before you purchase any whole life insurance plan. Being a long-term commitment, you should opt for a policy the premiums for which can be serviced conveniently.
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