Should you opt for single premium?

Regular payments are more beneficial for salaried policy holders

Life insurance holders often face a dilemma — to pay premiums on a regular (usually annual) basis or in a single go.

If you are undecided on the suitable mode of paying premiums for your unit-linked plan, term policy or endowment insurance, you must consider several factors such as cost benefits, taxation and cashflows before taking a final call. More often than not, opting for annual payments may be the desirable way for many policy holders, especially the salaried kind.

The cost angle

Take the case of a term plan. For a cover of ₹1 crore, a 35-year-old male teetotaller would have to annually shell out around ₹11,900, for the coverage to run till he turns 60. Thus, over a 25-year time-frame, the insured would have paid ₹2.97 lakh for the ₹1- crore cover. If he opts for a one-time single-premium policy, the amount for the same cover would be around ₹1.82 lakh.

It would appear from the example that the single-premium policy is cheaper by ₹1.15 lakh (2.97-1.82). But that would be an incorrect way to calculate the actual costs, as there is the time value of money to consider (inflation rate). So the right way to compare would be to find out the present value of the regular premiums that the person would pay for 25 years. Assuming a 6 per cent interest rate, the present value of ₹11,900 paid annually for 25 years would be around ₹1.61 lakh. So he would end up paying ₹21,000 less (1.82-1.61) in the first instance.

To put it in an even simpler way, if he invests the ₹1.82-lakh single-premium and earns around 6.5 per cent interest annually, he can pay the regular premium amount of ₹11,900 with the interest earned. Another point to ponder over is the possibility of the death of the insured person before the full term of the policy. In the above example, if the person were to die at, say, 40, he would have paid premiums for only five years, and his nominee would still get the full insurance benefits. The premiums paid for life insurance policies are allowed for deduction under Section 80C of the Income Tax act.

Taxation gains

The 80C Section is already crowded, with provident fund, public provident fund, life insurance premiums, home loan principal, five-year fixed deposits and tax-saving mutual funds being some prominent avenues vying for space within the ₹1.5- lakh annual limit.

If you are a salaried individual, chances are, you would already have investments in many of the above instruments and exhausted the limit. So a large single premium won’t give you any added benefit in terms of tax savings. Here too, regular premium payment seems better than investing a large single premium.

Easing cashflows

Single premiums serve the purpose in a few situations. If you run a business and the cashflows from your firm are lumpy, it would make sense to go with single premiums. As you would want your life and business income to be covered at all times, there is great risk in missing out paying premiums and renewing your policy.

Thus, for those with a business set-up or in cases where incomes tend to fluctuate over time, it would be safe to opt for single premiums, so that you are covered for the tenure of the policy. But for the salaried, opting for regular premiums would be ideal, as your cashflows would not be locked and could be better deployed elsewhere.

Gaining from market cycles

Given their attractiveness in terms of tax treatment (gains are exempt, subject to certain conditions), and healthy returns over the years, several investors opt for unit-linked insurance plans (ULIPs). ULIPs are market-linked products. That being the case, paying premiums on a regular basis would allow investors to average costs by buying at various price points in the market cycle.

But in the case of single-premium payment, it would not be possible to buy units at various levels as the entire amount is invested in one shot, thus putting a large sum at risk.

In short, paying regular premiums would suit a majority of the salaried class.

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