Individuals are preferring to buy single premium life insurance policies because of higher interest rates, convenience and flexibility the plans offer. The share of single premium to total premium has grown to 70% in May this year as compared to 55% in December last year. For private insurers, the share rose to 53% from 43%, and for Life Insurance Corporation, it grew to 82% from 70% during the same period.
The one-time payment options seem to be ideal for those who do not have a regular income. It gives them the flexibility to invest the investible surplus in one shot, choose the amount of coverage and get an associated life cover. The single premiums are fixed payments and do not change as per inflation which otherwise would be the case in regular payment options.
Rakesh Goyal, director, Probus Insurance Broker, says single premium policies provide a sense of financial security by allowing policyholders to lock in their coverage and potential growth upfront. “The growing awareness and understanding of the benefits associated with single premium policies have contributed to their increased sales, as individuals recognise the value they offer in terms of immediate coverage and potentially higher cash values or death benefits.
Similarly, Ashish Lath, business head, InsuranceDekho, says when interest rates are rising, it makes sense to lock in a high rate of return on your investment. “Single premium policies offer this option, as the entire premium is invested upfront,” he says.
Word of caution
While buying a single premium policy may be convenient, individuals must note that once they have purchased a single premium policy, they cannot change the amount of coverage or the investment options. The high upfront cost of single premium policies can be expensive and there is also the risk of outliving the money. “If you live a long life, you may eventually outlive the money in your single premium policy. This means that you will not have any death benefit to leave to your beneficiaries,” says Lath.
Experts say individuals should avoid buying single premium unit-linked insurance plans (Ulips). These plans are market-linked investment products with a thin crust of life insurance. As market volatility in the short run can sharply affect the fund’s net asset value, spreading the money across a period will save the policyholder from extreme market conditions. Moreover, single premium Ulips have higher fees as compared with regular premium Ulips, which can eat into your investment returns.
Benefits of rupee-cost averaging
Opting for a regular premium payment plan provides individuals with more liquidity and flexibility in accessing their invested funds if needed before the completion of the lock-in period. Regular premium payment plans allow for cost-averaging and enable individuals to take advantage of market fluctuations. By investing a fixed amount at regular intervals, individuals can potentially benefit from buying more units when the markets are down and fewer units when the markets are up. This strategy of rupee-cost averaging can lead to better long-term returns compared to a lump-sum investment in a single premium Ulip, where the entire amount is invested upfront.
Shailesh Kumar, co-founder and insurance head, Insurance Samadhan, says Ulips bought under an SIP route would give better returns because of simple logic of averaging. “In a single premium you are buying units at current net asset value. Moreover, the maturity amount can be taxed if the sum assured is not more than 10 times of the single premium,” he says.
So, if an individual is looking for an affordable, flexible, and low-risk investment, then a regular premium Ulip may be a good option. However, if he has a large lump sum of money available and is willing to take on more risk, then a single premium Ulip may be a better choice.
What to look for
Before buying a single premium policy, an individual must assess the coverage offered by the policy, including the death benefit, maturity benefit, and additional riders, to ensure that they align his protection needs. “To determine the influence on the total returns, evaluate the different charges related with the policy, particularly premium allocation fees, mortality fees, fund administration charges, and surrender prices. If it is an Ulip, examine the available fund options, historical performance, and whether the risk profile suits your investment preferences,” says Goyal.
LOOK OUT
* Individuals must assess their coverage carefully
* This includes the death benefit, maturity benefit, and additional riders
* They must evaluate the different charges related with the policy as well
* This includes premium allocation fees, mortality fees, fund administration charges etc.