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A life insurance policy with a whole-life option

LiveMint logoLiveMint 02-08-2017 Deepti Bhaskaran

This is a traditional life insurance cum investment policy by Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd, which offers the option to be insured for life or tailor your investment benefits as periodic pay-outs.

You can choose a maximum policy term of 30 years. Depending on your age, sum assured and premium payment term, the policy will calculate the annual premium that you need to pay. The sum assured under this policy is the guaranteed amount that you get on maturity or death. Over and above this, you also get the accumulated bonus accrued over the years. Being a participating plan, the investment benefits in the plan are pegged to the performance of the participating fund. This comes to you in the form of annual bonuses and is declared as a percentage of the sum assured. On maturity you get the sum assured plus all the accrued bonuses as a lump sum under the endowment option. Or, if you choose (at least 3 months before maturity), the insurer can also offer periodic pay-outs. Under this structure the accrued bonuses are given as lump sum and the guaranteed sum assured is paid over 15 years. “Periodic annual income over 15 years will depend on the 10-year g-sec rates at the time of maturity. The first income will be described as a percentage of the sum assured and will increase by 5%, compounded every year, to take care of your growing needs. The sum of payments will never be less than the sum assured,” said Rishi Mathur, head - products and strategy , Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd. 

In terms of insurance, under the endowment option, the plan terminates with the end of the policy term. 

If during the policy term, the policyholder dies, the nominee gets the higher of the sum assured plus all the accrued bonuses or 105% of all the premiums paid. Under the second option, called Endowment with Whole Life Cover Option, the insurance cover is available for life. So even when at the end of the policy term the maturity benefit is paid, the policy does not end, and the insurance cover lives on. 

Under this plan, if the policyholder dies during the policy term, the death benefit is the same as in the first option. If she dies after the policy term, but before turning 100 years of age, the policy will pay the sum assured. Post 100 years of age, the policy returns the sum assured and terminates. In either case the sum assured is paid twice.  

In order to calculate the investment benefits, we look at the two scenarios for a 35-year-old male, policy term of 25 years and a sum assured of Rs10 lakh. In the endowment option, the annual premium works out to Rs39,800 exclusive of taxes. Assuming the fund grows at 8%, the policy under the pure endowment option returns a total of Rs20.80 lakh. This is a net return of 5.28%. Under the settlement option, assuming the g-sec rate at 8% at the time of maturity, the net return on the total pay-outs is around 5.43%. Keep in mind that under the whole life option the annual premium will increase significantly to Rs50,300 for the parameters above, as it offers insurance for life. 

For a premium of Rs39,800 you get a sum assured of Rs10 lakh at age 35 years. If your need is insurance, it is better to buy a term policy instead. Also, you need to keep in mind that you need insurance as long as you are working and have financial dependants, and not in your retirement years. So when you buy a whole life plan, you pay for insurance that you don’t really need and also impacts your investments at the same time.

As for investment, from a cost perspective, this plan is expensive as the difference between gross and net yield is almost 2.7 percentage points. There are other insurance plans in the market that are priced lower. As per Shweta Jain, a certified financial planner and chief operating officer at International Money Matters Pvt. Ltd, one should keep insurance and investment needs separate, to derive the maximum benefit.

“This plan neither provides coverage at a reasonable cost nor is a viable option to consider if building a corpus for the long term,” she said.

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