What is the Death Benefit in a Whole Life Insurance Policy?

Your family is the foundation stone of your life. They provide you with a sense of belonging and help you navigate life’s challenges seamlessly. You would, of course, want to do the same for them to ensure they stay happy and safe throughout their lifetime. But, how do you ensure such protection and security?

Life insurance! This is a valuable financial tool that can help you financially secure the futures of your loved ones. It will help them cross all sorts of hurdles and give them the wings to fly to their dreams - whether or not you are around.

So, no matter what uncertainty life brings, your family members will always stay safe with a life insurance plan. And, if you want to ensure that this financial cushion lasts for long, you can go for a whole life insurance policy.

In this article, we will talk about whole life insurance and the death benefit payable under it. Let’s dive right in.
 

What is Whole Life Insurance?

Let’s talk about life insurance first. It is a contract between you (the policyholder) and an insurance company, where the insurance company promises to cover your financial risks. To receive the benefits, you must pay a fee to them called a ‘premium’.

Life insurance has two objectives -

• To protect your loved ones financially if you pass away during the policy period.

• Some plans also help you accumulate funds for financial goals like retirement planning, children’s milestones, buying property, etc.

The life insurance market offers you many types of plans like term insurance plans, endowment plans, money-back plans, whole life insurance plans, etc.  We’ll be discussing whole life insurance plans today.
 

Whole Life Insurance

Whole life insurance is a popular choice among people who want to leave behind a financial legacy, a monetary heirloom for their loved ones - so they can live a comfortable and secure life. Whole life insurance covers you for your entire life (up to 99-100 years). Its main aim is to offer lifelong protection and leave a financial legacy for your loved ones and help them live a stress-free life in your absence.

A whole life insurance policy can offer you a maturity and survival benefit. If you live past the age of 99-100 years, you will receive a maturity benefit from your insurance company. And, some insurance companies may offer you a survival benefit once the premium payment term under your plan is over, i.e., when you finish paying all your premiums.

The policy offers your nominee a death benefit if you, unfortunately, pass away during the policy term. The death benefit amount that they will receive is equal to the cover amount you’ve chosen under your whole life insurance policy.
 

What is the Death Benefit in a Whole Life Insurance Policy?

As discussed before, the death benefit under a whole life insurance policy is the amount of money given to your nominee if you pass away during the policy term. This is equal to your policy’s cover amount. Under Section 10(10D) of the Income Tax Act, 1961, the death benefit received by your family members is exempted from tax.

Your nominee will receive the claim amount based on the claim payout chosen by you during the policy purchase. You should choose the right claim payout option, depending on the financial aptitude of your nominee and the liabilities you have.
 

How is the Death Benefit Paid Out under a Whole Life Insurance Policy?

Here are the most common claim payout options available with whole life insurance policies -
 

? Lump Sum Payout Option

A lump sum payout option provides your nominee with the entire death benefit in a single go if you pass away during the policy term. You should opt for a lump sum payout if -

• Your nominee is financially well-versed and can handle a sudden, large influx of money. Remember, we are talking about lakhs and crores here, so it’s best to analyse how well they can use the money.
• You have debts, loans, and liabilities to settle. A large sum of money will help your nominee pay off all these obligations seamlessly.

For example, Rahul purchases a whole life insurance policy with a cover amount of Rs 50 lakhs as he has various loans to settle and wants to leave behind a legacy for his loved ones. He assigns his wife, Priya, as the nominee of the policy and chooses the lump sum payout option to receive the death benefit. Unfortunately, after 5 years of purchasing the policy, Rahul passes away due to a sudden illness. After Rahul's death, Priya is faced with several expenses such as outstanding debts, education of children, ongoing living expenses, etc. Since the lump sum payout option was chosen during the policy purchase, Priya will receive the death benefit of Rs 50 Lakhs as a lump sum in one go which will help her clear all the debts and meet other financial needs.
 

? Monthly Income Payout Option

If you choose the monthly income payout option, your nominee will receive the sum assured in monthly instalments for a specified time period - in case you pass away during the policy term. You should opt for a monthly payout if -

• Your family will need a steady stream of income to take care of their daily expenses, monthly bills, groceries, personal needs, etc.
• You think your family is not capable of managing a large sum of money.

For example, Nisha purchases a whole life insurance policy with a cover amount of Rs 1 crore. She assigns her spouse, Rajesh, as the nominee of the policy and chooses the monthly payout option. Unfortunately, Nisha passes away in an accident a few years later. Rajesh will receive the death benefit in the form of monthly instalments which will help him settle daily expenses, monthly bills, children’s school fees, etc.

Conclusion

A whole life insurance policy is a cover that guarantees lifelong financial protection for your loved ones. It's a way to leave behind a financial legacy for them. The death benefit can help them lead a comfortable life without compromising on their goals and needs.  To ensure the best outcome, it is important to make sure that the claim payout option is configured appropriately to meet their needs.