When you start planning your financial future and begin evaluating investment opportunities, you will have access to a host of products to choose from. You will likely chart out your financial goals, risk appetite and short-term and long-term requirement before you finalise your investments. One of the investments you can make is taking out a life insurance policy for yourself, particularly if you have, or plan to have, a family that’s financially dependent on you. A popular option is a term life insurance plan, where you pay premiums that provide you a life cover, securing the financial future of your family when you’re no longer around. But it’s not just a matter of choosing which term plan and which insurance provider is the right fit for you -- you must also evaluate whether you want a single premium term plan, or a regular premium plan.
Single premium vs regular premium term plan: What’s the difference?
The default understanding of term insurance is that one can pay periodic premiums (monthly, annually etc.) and if the policyholder dies during the term of the policy, the nominee is eligible to receive a death benefit equal to the sum assured from the insurance provider. However, you can also opt for another type of term insurance plan where you only have to pay a single premium. In a single premium term plan, you pay a lump-sum amount at the beginning of the policy, instead of periodic payments at regular intervals, which provides you life cover till the end of the policy term. Individuals who don’t have regular cashflows like a monthly salary, or find it difficult to pay recurring premiums, may prefer to opt for a single premium term plan.
Is a single premium term plan right for you?
Each individual will have varying circumstances, needs, and preferences that will determine what kind of premium frequency is ideal for them. Here are some things to consider when evaluating if a single premium term plan is the right choice for you:
- Source of income: Your income stream could be a key determinant in this decision. If you are a salaried individual, you would likely be saving money over a period of time, may not have a lump-sum amount and may therefore prefer making small regular payments. An individual with unpredictable or irregular income, who may be unsure of their ability to make a recurring payment commitment would be better suited to purchase a single premium term plan if they have an accumulated lump-sum amount.
- Cost: While a single premium plan will save you the hassle of having to make regular premium payments, do keep in mind that a one-time payment will work out costlier than a regular premium term plan (not in absolute terms, but at a discount rate to adjust for inflation). The lump-sum amount that you pay when you purchase the policy will be higher than the total amount you invest over the years in a regular plan. The amount difference between the two could potentially be invested in another asset to generate returns. Therefore, you should compare the cost of your chosen single premium plan with a regular plan and determine whether you are comfortable making that investment.
- Types of single premium plans: Apart from single premium term plans that provide just life cover, you also have access to plans that can fulfil a dual purpose of insurance and investment. These unit-linked insurance plans (ULIPs) allow you to invest your single premium amount in equity, debt or balanced funds of your choice. On maturity, the policyholder gets access to the fund value from the investment component, depending on the value of the funds they have invested in. If the policyholder dies during the term of the policy, the nominee receives either the fund value or the sum assured as the death benefit (or both - depending on the term of the policy). Therefore, it’s a good idea to evaluate the different kinds of single premium term plans available in the market and which one is best suited for your unique needs and financial goals.
- Tax implications: Life insurance policies are one of the most popular tax saving investments, because the premium that you pay towards your policy is tax deductible. However, in case of single premium term plans, it’s important to note that not all of them come with tax benefits . This is because according to the income tax mandate, the premium you pay should not exceed 10% of the sum assured provided by the policy as your life cover. If it’s above 10%, the maturity proceeds will be taxable under the applicable slab in the year of maturity. Maturity proceeds will also attract a TDS of 1%. This is significant because if you’re younger than 45 years and purchase a single premium term plan, the minimum sum assured is 125% of the premium amount. This amount does not qualify for tax benefits, because the sum assured is required to be at least 10 times the premium amount to be eligible for tax deductions. The maturity amount for single premium policies, however, will be tax-free if it’s under Rs 1 lakh.
- Long-term viability: Finally, you should evaluate if a single premium term plan makes sense in the long-run. This is because if the policyholder dies in the third year of taking out the policy, premiums would already have been paid for 10 or 20 years (however long the term of the policy is) in the form of the single premium payment. However, in case of a regular premium plan, the policyholder would have paid only two annual premiums and their nominee would still have access to the full death benefit in the form of sum assured.
That’s your low-down on single premium term plans! Like any other policy or investment avenue, you must carefully examine its features, benefits, and limitations, and evaluate whether it’s the right fit for your specific needs, preferences and financial goals.