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Single Premium Life Insurance Policies
Mr. Varun working in an MNC decided to purchase an insurance policy. After selecting the best company and the best plan suiting his needs and requirements, he was also asked to make an additional choice in regards to premium payment. He was asked to select between single premium life insurance and regular premium options. Let`s look at both the options and then decide the best option to chose from.
Regular premium life insurance policy option is the option in which a policy holder pays regular premium per year during the premium paying term of the policy. Regular premium payment further offers different modes of payments like monthly, quarterly, biannually and annually
On the other hand is the single premium payment option in which investor is required to make the payment just once throughout the entire term of the policy. The policy holder pays just once and continues to enjoy the cover for the full term.
You would find a lot of single premium child plan, single premium investment plan in the market.
Suitability of Single Premium Plans
Single premium policies are not suitable for all individuals. It is suitable for individuals:-
- With lump sum amount availability
- Who do not have a steady income or cash flow to pay regular premiums every year and have irregular income
- For those who travel a lot and it`s difficult to keep a track of premium payments.
Other features:-
Affordability
Single premium is for substantially large amount in comparison to regular premium amounts as in case of regular premium option the policy holder pays a small amount every year. Thus regular premium plans are affordable for majority of people who cannot make a lump sum investment.
Also as far as pricing is concerned single premium plans are overall lower as compared to regular premium plans. The main reason behind such differentiation is that in case of regular premium plans insurance company has to account for uncertainties like discontinuation of premium, sudden death and also for other renewal expenses.
Illustration
Mr. Varun aged 26 years selects a policy from LIC which is The Endowment Assurance policy for a sum assured of Rs.10,000,00 and for a term of 20 years and premium paying term of 15 years.
Let`s look at amount payable under different premium option.
1) Mr. Varun chooses regular premium as mode of payment
For Regular premium:-
2) Mr Varun chooses single premium as mode of payment.
Single premium= Rs.609900.00
It`s clear from the above table that Mr. Varun pays a higher amount towards premium in case of regular premiums but the amount due for single premium is a huge amount to pay in case of steady income and with no extra bonus.
Taxation of Single Premium Life Insurance
Single premium policies are eligible for tax benefits under Section 80(C) and 10(10)D of Income tax only if the annual premium is 10 per cent of the sum assured amount on death which implies sum assured has to be at least 10 times the annual premium(as per Budget 2012- 2013). A policy holder can claim Exemption under Section 80(C) on the amount paid towards sum assured for covering his life on all government approved schemes. Under section 10(10)D amount received at maturity along with bonus is not taxable.
Example:-If a premium for a policy is 50,000 it should have at least Rs.5,00,000 as the sum assured in order to enjoy tax benefits.
Flexibility
In terms of flexibility, single premium policies may not be as flexible as regular premium policies. Single premium policies offer only few options for accessing the money i.e by policy loan or surrender of policy. Also most of the companies do not offer riders on single premium policies in comparison to regular premium policies.
Advantages
1) Elimination of recurring payments
2) Tax benefits available
3) Overall premium amount is less in comparison to regular premiums
Conclusion
Single premium is a good option for those who wish to get rid from hassles of paying regular premiums. The total premium for regular premium plans is higher than single premium plans but investment in single premium plan requires a lumpsum investment. Thus, it is totally upto an individual to select an appropriate plan suiting his lifestyle.
In this instance, Mr. Varun should go for regular premium option as he has a steady income and does not have any lumpsum amount to invest at this point of time rather than single premium life insurance policy
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