Pay just once

Written by Saikat Neogi | Updated: Sep 18 2012, 05:49am hrs
The success of Life Insurance Corporations close-ended single-premium endowment plan, Jeevan Vaibhav, suggests that these products will remain popular despite this years Union Budget making most of these plans ineligible for tax breaks under Section 80C of the Income-Tax Act, 1961. While the insurance regulator, Irda, earlier had some reservations about these products, it has now allowed them to continue.

In a single-premium plan, the policyholder pays the premium just once during the policy term and gets the cover throughout the tenure. The popularity of the products can be gauged from the fact that in the three months to June, insurers sold individual non-linked single-premium policies worth R2,500 crore against R855 crore during the corresponding three months in 2011.

However, there was a sharp contraction in linked single-premium policies in the individual category as the markets were volatile and the regulatory changes dampened the demand for unit-linked policies. In the group single-premium category (both linked and non-linked) for the three months to June this year, insurers sold policies for R6,330 crore compared with around R4,288 crore during the same period last year.

Single-premium products are more popular with group policies. Up to July this year, private insurers sold group single-premium polices for R1,522 crore compared with R1,326 crore during the same period last year. The largest gainer was Life Insurance Corporation, which sold group single-premium policies of R11,063 crore till July this year compared with around R5,085 crore during the same period last year. Overall, the total collection of private insurers and Life Insurance Corporation in group single policies was R12,584 crore till July this year against around R6,412 crore till July last year.

In the state-run insurance behemoth's Jeevan Vaibhav policy, the minimum amount of the single premium was R95,210 and the basic sum assured was for R2 lakh for 10 years. There is no limit for the maximum sum assured and the sum assured is in multiples of R10,000. The policy is on the traditional platform where risk cover is the sum assured, which is almost double the premium chosen by the customer and offers guaranteed returns at maturity. The policy offers high liquidity through loan after just one year and the policy can be surrendered for cash after the policy has run for at least one year.

However, there is no income-tax benefit under Section 80C on this plan as the sum assured is less than 10 times the premium paid in the first year. The Finance Bill 2012 has proposed that the deduction for life insurance premium on insurance policies issued on or after April 1, 2012, will be allowed for premium or other payment made that does not exceed 10% of the actual capital sum assured.

Selling single-premium products by insurance companies makes sense as they reduce cost. Insurers do not have to pursue the renewal every year and the policy doesn't lapse.

Moreover, single-premium products suit those policyholders who have irregular income or who have a lump sum available to invest. The Irda guidelines have made it clear that single-premium policy cover will now be based on the age of the policyholder rather than the policys tenure.

Though the insurance regulator has fixed 2% commission payable to agents for selling single-premium policies, the products come with higher premium compared with regular premium policies and the entire sum is to be invested at one go, making it lucrative to sell these policies.

In the past and even now, at the individual level, the growth of single-premium products was driven by the growth in home loan as banks are insisting on insurance cover for the loan.

The premium for the insurance cover can be paid by taking a loan from the same bank financing the home loan. As per Irda norms, the minimum sum assured for a single-premium product has to be five times the premium paid. The sum assured cannot be reduced, except in the last two years of the policy.

Even at maturity, as per Section 10 (10) D, the premium should not exceed 20% of the cover in any year of the policys tenure so as to make the amount tax-free at maturity. Otherwise, the maturity amount is added to the total income of the person for that particular year. So, single-premium policies are disadvantageous from the tax point of view. For investors in the 20-30% tax bracket, the tax payable will be higher than lower tax bracket.

Analysts also say that single premium products with low sum assured will not be very popular with individual investors as a policyholder will not get any tax incentive. Insurers say they are redesigning their products to ensure risk cover is 10 times the annual premium.

They say single-premium policies can be made tax-efficient by adding term insurance premium to the original premium rate, which could enhance risk cover up to 10 times the total premium paid. As a result, single-premium policies would become costlier for those looking at tax breaks either at payment or at maturity.