Arjun works in a multinational company in Noida. Recently, the 30-year-old made plans to buy a life insurance policy. He expects to receive his yearly bonus from his employer soon, which has put him in a quandary: should he go for a single premium policy or a regular one.
Generally, the choice will depend on the income of the policyholders, their commitment levels, and the extra benefits of the policy. The factors that can help Arjun make his choice include:
Affordability: The first question to ask is whether Arjun can afford to pay a large single premium. While his bonus is expected to be sizeable, it won’t be sufficient to cover the entire cost. Salaried people like him may find it hard to pay the large amount up front. They might have to dip into their savings to pay, a scenario that can be avoided if they go for regular policies.
Convenience: Arjun is a forgetful person and fears that he might miss paying his premiums on time. This could lead his policy to lapse. In this case, it may be advisable to go for a single premium policy, that is if he can afford it.
Sum assured and premiums: For regular long-term insurance plans (with terms of 5, 10, or 15 years), the premiums are spread over an extended period. Policyholders are usually given a choice of the number of years they want to pay premiums. The premiums can be spread over for the first few years for a particular amount as sum assured. This way, the premiums will be lower than the onetime premium payment.
Single premium policies are seemingly cheaper than regular ones. Say Arjun has to pay Rs 10,000 as annual premium for 15 years for a sum assured of Rs 200,000. He ends up paying Rs 150,000 by the end of the tenure of the policy. But with a single premium policy, he will have to pay only Rs 110,000 for the same tenure and sum assured. He saves Rs 40,000 by opting for a single premium.
In case we take inflation into account, however, the situation looks different. At 6% rate of inflation, Rs 110,000 will be worth Rs 263,000 in 15 years. This means that Arjun will be paying much more for the same sum assured in terms of time value of money. This factor must be kept in mind while deciding which policy to choose.
Risk:Life insurance policies are usually long-term instruments, which means Arjun has to buy a policy with a long tenure. If he decides to pay a single premium, he is exposing himself to possible market volatility over the term of the policy. A regular product, contrarily, shields him from market ups and downs as he gets the advantage of 'rupee cost averaging,' the process that helps average the cost of investment in different investment cycles. This will protect him from market risks.
Tax benefits: Both types of insurance offer tax deduction benefits of up to Rs 1.5 lakhunder section 80C of the Income Tax Act. But regular policies look more attractive when it comes to issues of taxation. Policyholders have the choice of claiming tax exemption for the amount they pay for life insurance policies each year. Tax exemption for single payment policies is available for only the year the policy is bought. Single payment policies are chosen by those who go for unit-linked insurance plans (ULIPs) for investment purposes.
Other advantages: Regular life insurance policies often come with added benefits. They include covers for accidents, illnesses, etc. On the other hand, onetime payment policies don’t have such advantages.
While there are certain advantages of single premium policies, regular ones come with more features. If you are salaried like Arjun, you are better off with a regular policy. You might still go for a onetime payment option, but make sure it fits in with you long-term financial plan.