Whole life insurance – Does it make sense?

Term life insurance is something that every individual, who has dependents, should consider taking. However, there are many questions that one needs an answer to before buying a term life insurance. One of them is – till what age should the insurance cover be taken? A variation of this problem is – should one take whole life insurance?
(Related – How much term life insurance should you have?)
Prima facie, while life insurance may seem attractive to many. After all, one gets insurance cover for the duration of entire life – so it seems. But there is more to it.
(Most of the insurance companies have a cut off in terms of age in “whole life” cover – usually ranging from 80-100 years.)

Over here, I’ll try to make an argument towards – Why you shouldn’t take whole life insurance?


Whole life insurance

Let’s take a step back and ask the question –

What is the purpose of life insurance?

As I have articulated earlier – The purpose of life insurance is to cover the financial risk that may arise due to death of a person.
Any rationale for buying insurance and the specifics (cover, duration etc.) should be evaluated against above question. So, for example, if you have enough assets that there is no financial risk to your dependents in you death, you don’t need insurance. Or if you don’t have any dependents, you don’t need insurance!
While most of the insurance companies focus on having the primary breadwinner of the family insured, it may not be limited to him/ here (however this is a separate debate altogether!)
Here are 3 reasons why I believe that lifetime insurance do not make sense.

1 – You may have accumulated enough assets

By the end of your working life one is usually expected to accumulate certain assets, which may be passed on to family in case of death. In a way, “financial risk” to the family is not there in this case, as family should be able to manage on their own with these assets, if needed.

2 – Your “dependents” may not be financially dependent upon you

Life insurance is beneficial if you have people who are financially dependent upon you. This typically includes kids who aren’t working yet and/ or spouse. Once they are not financially dependent upon you, life insurance loses its purpose.
Beyond a certain age (say, kids are in 20s – or whatever number you are comfortable with), your children may be expected to be self dependent at least financially.

3 – Numbers may not make sense

The premium you need to pay for lifetime insurance cover is high – For example a 30 year old may pay Rs. 15,000 premium per year for life time insurance vis a vis sub- Rs.10,000 premium for an insurance cover up to 60 years. (Source – lowest quotes available via Policybazaar)
For whole life cover, you pay a higher premium for a longer duration of time. Beyond a certain point of time (say, 55 or 60 or 65 years) the benefit may be very limited or cease to exist – you may have enough assets, you may not have dependents or you may just have spent more on premiums than sum assured, over a long time horizon.
Example –
If you invest 15,000 per year for 50 years, you end up making Rs. 1 Crore at 8% interest rate (PPF interest rate currently – equities may give even higher!). So, if you pay a premium of 15,000 for a year for 50 years (age 30 to 80), you would have spent equivalent of Rs. 1 Crore (sum assured!) on premiums only. And premiums can be higher than this number depending upon a wide array of parameters & risk factors.
At the same time, thanks to inflation the value of this sum covered (Rs. 1 Crore) would probably have reduced manifold!
Anyway, beyond a certain period of time, if you are considering full life insurance, you are probably chasing returns (e.g. kids will inherit the money) rather than managing risk.
(You can use this excel sheet to calculate – Returns Calculator. Tweak with the premium and expected returns and calculate for different combination of numbers!)
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To sum up,
The purpose of insurance should remain managing financial risk. For any other purpose (E.g. returns, kids inheriting the money) there are other available investments.
This risk management mechanism should be there till the time there is financial risk associated – not beyond that. In case of life insurance, this typically comes much earlier than “Whole life” as insurance companies define it!

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