Life Insurance With Single Or Regular Premium
Life Insurance with Single or Regular Premium
Insurance Companies offer their customers various frequency options to pay for the policy that the customer takes so that it facilitates the customer as per his requirements. The regular premium policies can be thus paid yearly, quarterly or monthly by the policyholder. The insurance companies also provide a Single Premium option to customers so that a person who is not quite willing to go for a regular commitment and has a surplus amount can invest in the plan.
There are few factors that can help a customer to determine between a single premium and a regular premium.
The affordability factor is the most important factor that can prevent a person from investing in a single premium. For salaried and professional people investing in a single premium might become difficult as the premium amount is quite high. They generally do not have a high amount of surplus funds and thus cannot opt for single premium policies even if they find the policy suited to their needs or other factors beneficial.
If you check carefully it can be seen that the annualised percentage return of the Single Premium variant of a ULIP is generally higher than the annualised percentage return of the same plan with the regular premium option. In traditional plans too, the bonus declared in a single premium is generally higher than the regular premium. But what needs to be taken into consideration is that in the single premium policy the entire premium is being paid in one go and in a regular premium plan the single premium (which is way lower) is paid over the entire tenure of the policy. Therefore if the time period of investment of a premium is taken into consideration then the percentage return will not be strikingly different.
For example, if a premium of INR 20,000 is invested in a regular premium plan for a term of 10 years.
|First year premium INR 20,000||Invested for 10 years|
|Second year premium INR 20,000||Invested for 9 years|
|Third year premium INR 20,000||Invested for 8 years… and so on|
|10th year premium INR 20,000||Invested for only 1 year|
Thus the number of years the premium stays invested keeps reducing and therefore the premium paid in the last year only stays invested for one year.
On the other hand, a single premium of say INR 2,00,000 would be ENTIRELY invested for the entire tenure of 10 years. So, of course, there would be a difference in the returns, especially in case of a Unit Linked Insurance Plan, and not so much in case of an Endowment Plan.
So, if you consider the opportunity cost and the CAGR (Compounded Annual Growth Rate), then the difference is not significant enough.
Single-Premium policy at times may seem to be more cost-effective. You may get a certain amount of Sum Assured for a single premium policy and in order to get a similar sum assured for in a regular premium policy the added up premiums for the entire tenure would be higher, but if checked carefully that is not quite the case.
For example, let us take the example of a Term Insurance Plan, SBI Saral Shield Plan
Rahul, a 30-year-old healthy male opting for coverage of INR 20 lakhs for 30 years. The premium would be calculated as:
|Single Premium||INR 97,478|
|Regular Premium||INR 7,064 for 30 years|
i.e. Total Premium payable is INR 2,11,920
Thus apparently it may seem that the premium you are paying is more in a regular premium, but you need to keep the investment period and the inflation rate in mind too. Also, the opportunity cost of paying the entire premium at a lump sum.
And we must keep in mind that when we are investing in a single premium then the entire premium is remaining invested for the entire period of the tenure whereas in a regular premium plan the last premium stays invested only for one year, the number of years increasing subsequently as we trail back the years of investment.
Policy Payment Factor
A Single Premium Policy can give you a huge advantage and that is you can pay only once and forget about it. Neither do you need to remember the policy renewal dates nor keep funds arranged for renewal payments like you need to do in any regular premium policy.
If you have a surplus amount then just select a fund judging it on its returns and bonus history, as may be the case for a ULIP and traditional plan respectively and invest the amount. No further worries of keeping the policy alive by paying on time, or else losing on your capital in case the policy gets paid-up or lapsed needs to be kept in mind.
- Tax Benefit
Every Life Insurance Policy is eligible for tax benefit to be it a Regular Premium Policy or a Single Premium Policy. It is just that their terms and conditions are different. You are eligible to claim for a deduction under section 80C for a Single Premium Policy, and the full amount of the premium would be eligible subject to a cap of 1,50,000 INR. Thus for a single premium policy, you can avail this benefit only once, i.e. the year you pay the premium.
However, in order to avail tax benefits for the premium payable, the sum assured needs to be a minimum of 10 times the total single premium or the annual premium.
Even for maturity benefit to be tax-free under section 10(10)D, the sum assured needs to be a minimum of 10 times the annualised premium for all the years.
So, in our above-mentioned example, Rahul, a 30-year-old healthy male opting for coverage of INR 20 lakhs for 30 years through SBI Saral Shield Plan:
10 times calculation
Tax Benefit U/S 80C and 10(10)D
|Single Premium||INR 97,478||10 times the Single Premium = INR 9,74,780 < Sum Assured of INR 20 lakhs||Since Sum Assured is > 10 times the premium, it is eligible for Tax Benefit U/S 80C and 10(10)D|
|Regular Premium||INR 7,064 for 30 years||10 times the Annual Premium = INR 70,064 < Sum Assured of INR 20 lakhs||Since Sum Assured is > 10 times the premium, it is eligible for Tax Benefit U/S 80C and 10(10)D|
So, if the Single Premium is INR 1,00,000 then, the Sum Assured of the policy at no point in time, in the entire tenure can be lesser than INR 10 lakhs. In case there is a breach in this condition then the entire maturity benefit would be taxable. This means that the entire maturity benefit would be added to your income of that year, and tax would be computed according to the slab.
In case of death claim, the sum assured received by the nominee is exempted from tax in both single and regular premium policies.
- Risk Factors
The major risk factor that a customer runs when he invests in a single premium policy is its timing. When investing in a regular premium ULIP plan the investment is distributed over a period of time and thus a sudden dip in the market is much less liable to affect your investments. In a regular premium policy, you enjoy the benefits of the rupee cost averaging as the investment is done at regular intervals, but if the investment in a single premium policy is done when the market is inflated and post that there is a scenario where the unit price of the policy dips for any reason then you would most likely face a loss, or the investment won’t yield the amount of interest that you would have expected it to bring in otherwise.
Difference between the Advantages and Disadvantages of Single Premium Policy Vs Regular Premium Policy:
|Single-Premium Policy||1. No need to remember premium renewal dates||1. Life coverage provided in a single premium policy is only 1.25 times of the Premium.|
|2. No need to keep fund to pay the premium at regular intervals||2. You miss out on the rupee cost averaging. This can prove to be a loss-making situation in case the investment is timed wrongly.|
|3. Your policy can never go into the paid-up status, or be moved to a discontinuance fund even if you face a financial contingency as you do not need to renew the policy||3. Tax Rebate under Sec 80C is available only once during the policy tenure; the first year when the policy premium is paid.|
|4. Charges that you need to pay for the policy like the allocation charge are deducted only once||4. Tax Redemption under Sec 10(10D) is subject to the clause that the Sum Assured remains at least 10 times at all point during the policy tenure|
|Regular Premium||1. The power of compounding can be more effectively witnessed when a premium is paid regularly||1. Renewal dates have to be remembered and can be a hassle for those who are not strategic in their investments|
|2. Tax benefits under Sec80(C) can be availed every Year||2. In case you fail to pay the regular premium in a traditional plan the policy receives a paid-up status where you are entitled to a paid-up value which is only 30% of all the premiums paid, post the deduction of the first year’s premium.|
|3. You can avail Tax redemption under Sec 10(10D) at maturity||3. If you fail to pay the regular premium in a ULIP plan before the lock-in period of 5 years is over, then your fund is moved to a discontinuance fund where you receive only a nominal value of about 3.5% per annum only.|
|4. You invest at regular intervals, therefore, you get the advantage of the rupee cost averaging||4. Charges like the allocation charges are deducted every year.|
Thus if you are salaried personnel or a professional, and you have a steady flow of income, which you are expecting to have for a certain period of time that covers the term of the policy you are opting for, then it is advisable that you take a regular premium policy. But in case you have a surplus fund like an extra profit in a business that would not be needed in your business or a bonus received at the end of the financial year, and you are not sure whether the same amount would be available with you at about the same time for next few consecutive years, then you should opt for the single premium insurance plans.
Thus Single Premium policy is advantageous to you only if you want to avoid the commitment of the renewal in a policy, but if the commitment is not a problem then a regular premium policy would be more beneficial in terms of investment amount (inflation is taken into consideration) and in terms of interest earned.