Personal Finance

ULIPs: Single premium or regular premium?

Rajalakshmi Sivam | Updated on May 28, 2011 Published on May 28, 2011

Here's what you need to know before you decide whether to take the single or regular premium policy on ULIPs.

Before getting into a long-term commitment to pay premiums for a unit-linked insurance policy (ULIP), it pays to know about the products available in the market and make an informed choice.

Ashok bought a policy just before the last date for filing income tax returns. The agent he approached sold him a single premium unit-linked insurance (ULIP) policy of premium Rs 1 lakh. Ashok was happy that he could exhaust the full limit under 80C. But it was only later that he discovered that the policy had a limited life cover and was not eligible for full tax exemption!

The taxman looks at only the ‘life cover' component of a unit-liked policy and mind you the single premium unit-linked policies are basically investment products and generally have a low sum assured.

Ananya purchased a regular premium ULIP for an annual premium of Rs 50,000. She paid the premium for two years but couldn't pay in the third . To her horror, she discovered that she would receive only 3.5 per cent per annum return on her accumulated fund for the remainder of the lock-in period.

Both are situations you'd want to avoid. So, let's see how you can opt for the right policy and avoid these pitfalls.

Single premium policy

Single premium ULIPs are definitely hassle-free for a buyer in the sense that they don't require periodic renewal. It is an investment product aimed at a buyer who is looking to invest the surplus money in his hand which is probably a one-time windfall gain.

‘Life cover' is not the key element of the product and comes just as an add-on. Insurance regulator, IRDA, has mandated insurers to give a minimum cover of 1.25 times the premium on a single premium policy (when age at entry is less than 45 years). Many of the recent launches including SBI Life Smart Wealth Assure have a minimum cover of 1.25 times.

However, to claim the tax benefits under section 80C (where contribution to a ULIP is allowed as a deduction from total income) and section 10(10D) (where the maturity proceeds from a ULIP is tax exempt), the sum assured in a ULIP should be at least five times the premium amount. What if the sum assured is lower? Then, you get only 20 per cent of the premium as exemption for tax purposes and the maturity proceeds will be fully taxed.

Charges on a single-premium policy may not be significantly lower compared to a regular premium policy. “Single-premium policies have the same cap on charges in terms of reduction in net yield as do regular premium policies, says Suresh Agarwal, Executive Vice President, Kotak Life Insurance.

Regular premium policy

If you are sure of a regular flow of income and looking to build a long-term portfolio by saving sincerely , you can opt for a regular premium policy. Regular premium policies are available with monthly, half yearly and annual premium payment options.

Even in a regular premium policy, if you do not like to have a long premium-paying term, you have the option of restricting it.

Almost all insurers give a choice on the premium paying term which is lesser than policy term. But, what if someone later wants to continue on the policy after the end of the premium paying term? Insurers have a way out for this too.

However, the single premium policy scores higher because there is no risk of missing renewal premiums. “If the renewal premium is not paid in a regular premium policy, the outstanding money will be taken off from the policyholder's account and moved to the ‘discontinuation' fund which is a pool account maintained by the industry,” says Mr Rituraj Bhattacharya, Head-Market Management and Product Development, Bajaj Allianz Life Insurance.

Insurers are required to give a return of 3.5 per cent only per annum on the amount in the discontinuation fund.

This means an almost negative real interest currently when inflation is rising over 7-8 per cent!

Top it up

Be it a single premium policy or a regular premium policy, insurers offer a facility to top-up the policy where the policyholder is allowed to pay a lumpsum and increase his investment under the policy. Top-up facility is available even after the premium payment ends in a regular premium policy, says Mr Madhivanan Balakrishnan, Executive Director, ICICI Prudential Life Insurance. Do note that while the top-up premiums do enjoy tax benefits in the way single premium unit-linked policies do, they also have a five year lock-in period.

Every time you have a lumpsum amount, topping up the existing policy is a better idea than buying a new policy.

This is because, in top-up premiums there is no additional policy administration charge (policy administration charge on a regular premium policy is normally around 2 per cent on annual premium for first five years and keeps increasing from the fifth year).

However, premium allocation charge, fund management charge and mortality charge will be levied.

Do keep in mind that not all insurers offer unlimited top-ups and some insurers have a 25 per cent bar on the top-up limit .

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