Legacy planning with whole life insurance

In recent times, wealth preservation has gained a lot of importance along with asset management. And, in order to transfer wealth to the next generation, greater emphasis is given to ‘legacy planning’.  

Legacy planning is something most financial advisors shy away from talking about. It can be referred to as a financial tool that ideally doesn’t get associated with wealth transference as most of the time, it is only viewed as a tool to secure funds for financial obligations or to replace the family’s income. However, legacy planning is quite comprehensive in nature as we need to plan for it without compromising our current lifestyle.  

Three aspects of legacy planning  

1. Legacy creation: Legacy creation is the first step towards legacy planning, in which, not only future but also, current requirements are taken into consideration.  

2. Succession planning: Legacy planning is not just about creating a financial corpus for your dependents in your absence but also, to create a corpus, which you can pass onto your successors.  

3. Wealth distribution: Accumulation for passing on a legacy is just one part while chalking out its distribution is another.   

What is whole life insurance?  

Whole life insurance is nothing but pure-term insurance, which basically provides life cover for your whole life, typically limited to 100 years of age. In this, if the insured dies, then his/her nominee gets the entire amount in one go.  

How whole life insurance can help you with legacy planning?  

Whole life insurance helps you with the accumulation part of your legacy. On the other hand, the distribution of legacy needs you to have a registered written will or can also have a trust. The whole life insurance helps you with respect to the accumulation part as you would be paying premiums up to the age of 60, which is usually considered to be the retirement age. The early you start, the lower the premium.   

So, in order to determine the sum assured, you first need to calculate the required corpus. Let us say, your current age is 40 years, and you wish to pass on Rs 2 crore as a legacy to your children. This means that, on average, you would attract a monthly premium of Rs 52,000 or an annual premium of Rs 6.15 lakh. Further, the sum assured in the hands of the nominee is not taxable. Not just that, you can also take benefit of deduction under Section 80C of Income Tax Act up to Rs 1.5 lakh.  

Is whole life insurance efficient than mutual funds?  

Another way of creating a legacy is through mutual funds. So, is whole life insurance better in creating a legacy than mutual funds? Let’s find out.  

Say, rather than paying a premium of Rs 52,000 per month, you can start a SIP with a mix of equity & debt mutual funds, fetching you a compounded annual growth rate (CAGR) of 10 per cent. Then, after 50 years from now or when you turn 80, your accumulated corpus via mutual funds would be Rs 76.50 crore, which is almost Rs 74.50 crore i.e. more than whole life insurance. However, the only con with mutual funds is that they won’t be able to provide a similar amount in the near term. This means that if something happens to you in the near term, then the whole life plan would give you Rs 2 crore but mutual funds alone might not be able to give the same amount in that much time span. However, we can fix this with the help of a pure-term life insurance plan, which would cost you much less than a whole life plan.