There is no doubt that insurance continues to be a complex topic for most of us. And as if selecting the best life insurance plans, from the plethora of options available, is not enough, we many times struggle to decide whether we want to make a one-time premium payment or go for regular pay-outs.
For a starter, a single premium insurance plan is one in which you make a lump sum payment up front for the product. This is an alternative to paying regular premiums on a monthly or annual basis. So, how do you choose what’s best for you? Consider the following points and see if single premium is a better option or not.
Long term cost
Since life insurance is a cost that needs to be planned, the amount of payment is a big consideration for anyone to decide between these two options. Let’s do some calculations. Let’s say, you are a 30-year-old and you choose a policy for a cover of Rs 1 cr for 35 years. Thus, on calculating, your regular premium comes to roughly around Rs 8,350 annually. However, if we choose the single premium payment mode, your one-time premium is approximately around Rs 2,30,000.
On the face of it, you save nearly Rs 60,000 [8,350 (annual premium) x 35 (term period) – 230,000 (lump sum payment)] when you go for single premium plan over regular pay-out option. Now this has been plain simple mathematics.
However, we are yet to factor in inflation. Currently, inflation is at 7 per cent and it would be not be foolhardy to assume that inflation would continue to grow at a similar rate or higher on an average over the next three decades or so. Thus, the real value of Rs 8,350 would be much lesser with each passing year. So, even as you pay Rs 2,30,000 on the current prices and save money, your regular pay-outs would be much discounted on current prices factoring in inflation.
This is much simple to understand. In both cases, you are entitled for tax benefits irrespective of the kind of premium you choose. But, here’s the catch. While in a single premium, you are eligible for one-time tax benefit because of the nature of the premium, however, in a regular premium policy, you can avail tax benefits every year till the time of the maturity of the policy. Currently, you get a tax exemption of up to Rs 1.5 lakh. In the case of a single premium, your one-time premium is most likely to go above this upper limit. Now, couple it along with your other tax deductions in the year such as provident fund, health insurance among others. This means that you might lose on tax benefits if your lump sum payment is a big figure. However, tax exemption on regular premium can be availed by you every year as your premium is most likely be more likely to be within Rs 1.5 lakh limit.
In case of death
Lastly, in an unwarranted situation such as death during any time of the policy term, your insurer is supposed to pay your full sum assured. However, in the case of a single premium, if you die god forbid in the first few years of buying the policy, you would have paid for the future that you could have saved and invested elsewhere in case of a regular premium plan.
Still not clear? Allow us to explain. Say, in the above example, you die in the 11th year. Thus you would have paid for the remaining 24 years, which you could have avoided, had it been your regular premium policy.
Also, riding on this figure, if you had decided to save this amount in let’s say a recurring deposit, you could have earned yourself a minimum of 7 per cent interest on the deposit. Thus, the interest earned would have doubled your investment, on an average, in 7-8 years Thus, you would have not only had a life insurance cover at a minimal cost but also allowed your money to grow, thus securing your family’s future in other ways.
One must note that single premium plan is opted by those who either have a very high income or have money sitting idle in their bank accounts. While lump sum payment allows a peace of mind, as you don’t have to worry about policy lapse and chase dates by making a payment in one go, regular premium plan has far more benefits and offers better return on investment. At the end of the day, it’s your choice which option you are more comfortable with and what suits your requirement better.
The author is co-founder & CEO, PolicyBazaar.com