All You Should Know About Single Premium Life Insurance

Life insurance is a contract between an insurer and a policyholder. An insurer guarantees a sum assured to the beneficiary/ nominee on the policyholder's unfortunate demise in return for the premiums paid. In simple words, Life Insurance provides financial security to your family so that they continue living the same lifestyle without any compromises due to the financial instability caused because of the loss of an earning member.

The insurers offer this coverage in return for the policy premiums you pay. Since yearly premium payment is a common practice in India, many policyholders are not aware that you can choose the premium payment frequency as per your convince under Regular Premium Payment Plans. You can choose to pay your life insurance premium monthly, quarterly, semi-annually, and annually. Moreover, there is one more premium payment plan called Single Premium Payment Plan that allows you to pay a one-time premium for the entire life insurance term. But is it a wise choice to opt for a Single Premium Life Insurance Plan?

Let us first see what a Single Premium Life Insurance Policy is:

A Single Premium Life Insurance Plan is a premium payment plan that allows you to pay in a lump sum to enjoy life cover for the entire policy term. As compared to Regular Premium Payment Plans where you need to pay the life insurance premium on a periodic basis, i.e. monthly, yearly, etc., the Single Premium Plan is a one-time life insurance solution.

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Here are a few important things you should know about a Single Premium Life Insurance Policy:

1. The plan allows you to pay a one-time premium and provides you insurance cover for the entire policy term. This way you do not have to remember the policy renewal date, which is a great convenience for many busy policyholders. It also eliminates the chances of late payment charges or lapse of a policy due to non-payment of the premium on or before the due date.

2. Since you pay the entire premium in one go, the Single Premium Payment Plans typically have a lower premium compared to regular plans. However, it is not guaranteed that you pay a lower premium. Hence, you should check how much exactly you are saving on the premium by opting for a single payment plan.

3. If you are considering opting for a Unit Linked Insurance Plan (ULIP) with single pay, it could be a high-risk investment as it exposes you to market volatilities. Whereas, when you opt for a Regular Premium Payment Plan, your money gets invested in regular intervals irrespective of whether the markets are going up or down, giving you the benefit of rupee cost averaging.

4. In the case of a Single Premium Life Insurance Policy, once you choose your sum assured, you cannot increase it as per your life stage requirements. But the Regular Premium Payment Policies come with several features and add-ons that let you customise your life insurance policy as per your requirements. For example, Increasing Life Cover Policies let you increase your life cover based on your life stages, a Return of Premium Policy pays you all the paid premiums back if you survive the policy term, and most policies offer add-ons, such as critical illness rider, accidental death benefit rider, etc. These are some of the examples of how the Regular Premium Payment Plans can offer you extended benefits that might not be offered in Single Premium Life Insurance Plans.

5. You might already know that you can claim a tax deduction of up to Rs 1,50,000 under Section 80C of the Income Tax Act, 1961. While the Regular Premium Payment Policy allows you to claim deductions every financial year until you pay the life insurance premiums, the Single Premium Payment Plan allows you to claim the tax deduction only once - - the year you purchase the policy. However, the payouts for both plans are tax-exempt under Section 10(10D).

6. The plan might be affordable compared to Regular Premium Payment Plan, but if an unfortunate event takes place in the earlier policy term, it can be very expensive. For example, if Mr Parth has bought a Single Premium Term Plan with a sum assured of Rs 50 lakhs for a one-time premium of Rs 80,000 for a 10-year term. And, the regular premium for the same plan is Rs 8,500 p.a. If Mr Parth dies in the 6th year of the policy term, his nominee will get the sum assured of Rs 50 lakhs for the one-time premium of Rs 80,000. However, if he had opted for a regular plan, he would have paid Rs 51,000 for the same sum assured.

The Single Premium Life Insurance Policy is ideal for whom?

The Single Premium Payment Plan is certainly not ideal for everyone. Generally, it is preferred by individuals who have received a sudden lump sum amount as a gift, inheritance, etc. So, if you have received such a lump sum amount, already have sufficient investments for your different financial goals, and do not want to invest it in the market, then you might want to consider a Single Premium Payment Policy as you will not have to make regular payments for life insurance in the future (until the term ends).

The plan could also be suitable for business owners, self-employed professionals, freelancers, etc. who are doing well at the present but there is no guarantee of their future income. For them, covering their life when they have a sufficient amount in their hands is the right choice. If the future is uncertain, they might not be able to afford to pay the life insurance premiums regularly.

The Single Premium Life Insurance Policy is not for salaried individuals who receive a fixed monthly salary. The Regular Premium Payment Polices with a monthly or yearly frequency works best for most individuals.

To conclude...

While the Single Premium Life Insurance Policy is a convenient tool to ensure your family is financially protected, it might not prove to be a cost-effective plan. Besides, the plan is not suitable for most individuals as it needs a lump sum investment. On the contrary, a Regular Premium Life Insurance Policy can benefit you in several ways as the premium payment is affordable to everyone and you can customise the basic policy by adding suitable add-ons and riders or even increase the sum assured as per your life stages. Moreover, to make sure you do not miss the premium payment date you can register for a standing instruction facility that enables automated payments on the due dates.

Warm Regards,
Ketki Jadhav
Content Writer