Are you looking out for a life insurance plan that provides you lump sum amount and a tax-efficient investment? Have you ever thought of opting for a single premium life insurance plan? It offers the dual benefits of life cover and tax savings. But how does it different from a regular term insurance plan where you have to pay a premium amount for a fixed number of years or till the plan maturity?Read more
*Tax benefit is subject to changes in tax laws. *Standard T&C Apply
** Discount is offered by the insurance company as approved by IRDAI for the product under File & Use guidelines
Let’s understand what is single premium policy and how this plan works in detail:
A single premium life insurance is the plan in which the policyholder makes a payment of a lump sum to enjoy life cover for the full term of the plan. It takes away all your stress of making regular payments on time. As compared to a regular or traditional premium plan where you are required to pay premium amounts at periodic time intervals, this is a 1-time solution of payment for those individuals who don’t want to get into the stress of paying a premium at regular intervals. After paying the premium, you become the policy owner with a death payout. It is a ‘fill it and forget it’ type of plan.
Most individuals prefer to purchase a single premium life insurance plan when they have a lump sum amount with them. It might be a heavy tax fund, a gift in cash from a relative as an inheritance, or some gains in bonus in businesses. If you do not want to spend this amount now and are distrustful of investing the amount in the markets, you can choose a single premium life insurance plan.
Those who have or suddenly come into a large pool of cash because of an inheritance or similar things
Businessmen who have made irregular profits in 1 year
Since a life insurance plan is a long-tenure product, those who don’t have an assured income source and thus may not be able to pay regular amounts of premium every year may choose single premium plans. For example, freelancers, and consultants get to pay for work or assignments for a short term on a contract basis.
As we have discussed, the single premium policy meaning and who should buy this plan. Now let’s go through the working of this plan through below example:
Shyam is 31 years old and purchases a single premium life insurance with a policy tenure of 10 years. He chooses a cover of 10 Lakhs for which he regularly pays 1 lakh as a premium. In case of Shyam’s death, the nominee will get 10 lakhs as a lump sum. On contrary, if the policyholder outlives the policy term, he receives maturity benefits based on the assets performance of an investment.
So, before buying the single premium life insurance plans, you should consider the following points:
The payment as a lump sum is a feasible way only for those who have a large amount of money. Salaried persons cannot opt for 1-time investment as it is quite expensive.
You can claim for tax savings benefit for the year when you pay the lump sum to purchase the plan. As discussed, in regular plans, there is a claim tax deduction on premium payments. This is not with single–premium life insurance.
Single premium life insurance is a popular choice among persons as it helps save taxes at the last of the fiscal year.
You do not have to stress about the plan getting lapsed due to non-payment of premiums. Opposite to a regular plan, it tracks the premium amount and pays it regularly on time.
Once the premium amount is paid the single premium life insurance is applicable until the last of the policy term, unlike a regular term plan where you are required to pay premium amounts on an annual, half-yearly, quarterly, or monthly basis.
The tax savings benefit is the same as a regular term plan. This simply means that the premium amount is eligible for a deduction on tax u/s 80C of the ITA, 1961, while the life cover is exempted u/s 10D of ITA.
As per section 10D of the ITA, if the premium amount on the plan exceeds 10 percent of the SA for plans issued after April 1st 2012 and 20 percent of the SA for plans issued before 1st April 2012, the sum assured amount on maturity payout is subjected to tax.
In the case of a single premium life insurance plan, the chances of the premiums exceeding 10 percent of the life cover are higher. Though it is a 1-time payment option, the premium could be high.
Policy buyers of 1-time plans have the option to save tax by paying a premium on one go, but only one time in a fiscal year. If you purchase more than 1 single premium life insurance plan, you can avail of exemptions on tax only on one plan for that fiscal year. This directly means that you can purchase a new single premium plan each year and avail of tax benefits.
If the life assured dies before completing the term, the death benefit could become costlier. For example: if Reema paid 50000 as 1-time payment for a plan of 20 Lakhs for 10 years. Reema dies in the 7th year and if she has chosen to pay a regular premium, she is required to pay only 5000 for a year which would become Rs. 35000 for 7 years. The death benefit amount for your family members would still be the same in both cases.
You can choose a single premium life insurance plan that meets your investment needs if you have money lying idle. A single premium term plan allows you to pay a premium for a life cover at one go and also offers tax benefits. Before buying a plan, you can compare them carefully using a life insurance calculator. You can also visit policybazaar.com to check different plans and choose one that matches your preferences perfectly.