Life insurance: Is single premium policy for you?

Selecting between a single and a regular premium policy depends on factors such as the convenience of the payment option, your budget and addition of riders on extra payout.

Life insurance: Is single premium policy for you?
Single pay policies mostly find favour with high net worth individuals who have lumpsum money to be invested, points out Mehta.

Many customers are prefering to buy single premium life insurance policies for financial protection, attracted by the flexibility these offer to invest the investible surplus in one shot and get an associated life cover. In the last one year, the share of single premium to total premium policies has grown to 79% by July this year as compared to 65% in the same month last year, data from Kotak Institutional Equities Research show indicating individuals are preferring bullet payment as they are unsure about fulfilling any long-term commitments for recurring life insurance premiums.

With an increasing number of people switching to either seasonal jobs or starting a business, the one-time payment options seem to be ideal as they need not worry about fluctuations in income from time to time.

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Nitin Mehta, chief customer officer, Bharti AXA Life Insurance, says single premium policies are not impacted by the difficulties one may face in paying regular premiums over the policy payment term which typically ranges between 10 to 15 years. “It gives the flexibility to an individual to invest the investible surplus in one shot and get an associated life cover,” he says.

Rakesh Goyal, director, Probus Insurance, says the single premiums are fixed payments and do not change as per inflation which otherwise would be the case in regular payment options. “The amount paid under a single premium would be comparatively lower than the overall sum of the regular premiums,” he says.

Selecting between single and regular premiums

Selecting between a single or a regular premium policy depends on several factors such as the convenience of the payment option, the budget of the policyholder, addition of riders or other add-ons on extra payout.

Goyal of Probus suggests that a single premium policy is for someone who is willing to lock his money and receive a decent amount of returns. “On the other hand, regular premiums are recommended for individuals who rely on their regular paychecks and cannot afford or prefer to invest a huge amount in one go. Furthermore, single premiums are for a short duration whereas regular premiums are considered for higher years,” he says.

Single pay policies mostly find favour with high net worth individuals who have lumpsum money to be invested, points out Mehta. “Having said tha,t insurance is just one of the financial services instruments and for holistic financial planning it may require complete portfolio mapping and life stage of the individual to determine avenues of investment,” he suggests.

Avoid single premium Ulips

Unit-linked insurance plans (Ulip) 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, individuals should avoid investing in a single premium Ulip. Experts say individuals should look at a regular premium payment plan and let the money get invested in regular intervals incase of Ulips. Spreading money across a period will save the policyholder from extreme market conditions. This way, the policyholder will benefit from the rupee averaging and earn higher returns in the long run.

Before investing in a single premium Ulip, one must look at the cost structure carefully. Higher costs will reduce the value of the fund in the long-run. The premium allocation charge in Ulips is directly deducted from the premium paid by the policyholder for allocating the units. It is charged by the insurers to recover the costs incurred in processing the policy such as underwriting, medical examinations and distributor fees.

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Tax benefit

A policyholder can avail the tax benefit up to Rs 1,50,000 under Section 80C of the Income-Tax Act on the annual premium paid for a life insurance policy. The tax benefit is applicable for both single premium and regular premium policy. However, in a single premium policy, the policyholder will get the tax benefit only once and in regular premium one can avail of the tax benefit on each renewal payment.

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