Single Premium Life Insurance vs Regular Premium Life Insurance: Which Is a Better Option?

The insurance premium is one of the key factors individuals take into account when buying a life insurance policy. Apart from the premium, it is also advisable to consider the insurance premium payment frequency while finalising the policy. When it comes to paying for life insurance, you have two options: Single Premium Life Insurance or Regular Premium Life Insurance. Before determining which payment plan suits you the best, it is best to comprehend the concepts. This article explains the functioning of both; Single Premium Life Insurance and Regular Premium Life Insurance and helps you choose the one that best suits your requirements.

Before we delve into the types of Life Insurance Premium Payment Plans, let's first understand what the premium in a life insurance policy is:

Life Insurance is an agreement between an insurance company and an individual who holds the policy. The insurer pledges to pay a predetermined amount to the designated beneficiary or nominee in the event of the policyholder's untimely death in exchange for the premiums that have been paid. To put it simply, life insurance offers a means of financial protection for your family, ensuring that they can maintain their current lifestyle without facing any compromises due to the financial instability resulting from the loss of a primary breadwinner.

The premium in a life insurance policy refers to the payment made by the policyholder in exchange for the benefits provided. It acts as a guarantee that the insurance company is obligated to pay out the benefits stated in the policy to the beneficiaries. There are two options for paying the insurance premium: Single Premium or Regular Premium payments. The choice of payment method depends on the individual preferences.

In India, it is common for policyholders to make yearly premium payments as many are unaware that they have the option to choose the frequency of premium payments under Regular Premium Payment Plans based on their convenience. This means you can opt to pay your life insurance premiums on a monthly, quarterly, semi-annually, or annually. Besides this, there is another premium payment plan known as the Single Premium Payment Plan, which allows you to make a one-time premium payment for the entire duration of the life insurance policy. Let's learn about these two premium payment plans in detail.

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Regular Premium Life Insurance:

Regular Premium Life Insurance involves the policyholder making periodic payments at consistent intervals, such as monthly, quarterly, semi-annually, and annually, throughout the entire duration of the policy. Many individuals prefer Regular Premium Plans because they offer the convenience of automating payments through various mobile applications and platforms.

Single Premium Life Insurance:

A Single Premium Life Insurance is a payment option where you can pay a lumpsum amount upfront to obtain life coverage for the entire duration of the policy. In contrast to Regular Premium Payment Plans, where you need to make periodic payments such as monthly or yearly, the Single Premium Plan offers a one-time solution for life insurance.

Difference Between Regular Premium Life Insurance vs Single Premium Life Insurance:

1. Convenience:

A Single Premium Life Insurance Policy is typically considered more convenient than a Regular Premium policy because in the Single Premium policy, you only need to make a single payment, and the insurance company handles the rest. Whereas, with a Regular Premium policy, you have to remember to send in your payments periodically. However, with the advent of automated payment systems, Regular Premium policies have become an appealing option as well.

2. Premium:

Another notable difference between the Single Premium and Regular Premium life insurance is the cost factor. When choosing a Single Premium Plan, you are required to make a lumpsum payment for the complete premium amount at the time of purchasing the policy. However, with this payment plan, there is a possibility of paying more in terms of the time value of money. On the other hand, Regular Premium policies involve making periodic payments over a specified duration for a predetermined amount. Generally, opting for a Regular Premium Policy is considered a more cost-efficient approach to buying an insurance policy.

3. Budget:

Your budget and financial plan are important considerations when deciding between different insurance premium payment plans. Opting for a Single Premium Insurance Plan requires allocating a considerably large amount towards the insurance coverage, which can disrupt your budget for that specific year. On the other hand, with a Regular payment plan, the total premium amount is spread across multiple terms, allowing flexibility to your budget.

4. Personalisation:

Both types of life insurance premium policies offer a high level of personalisation. However, personalising a Single Premium Insurance Plan typically requires paying a significantly larger lumpsum amount. On the other hand, with a regular premium payment plan, the amount can be spread over a period of 15-20 years, which may alleviate financial pressure. Moreover, the Regular Premium Policy allows for more flexibility in making changes to preferred riders compared to the Single Premium Policy, which can pose challenges in this regard.

5. Risk:

Given the long-term nature of these instruments, once the payment is made, the funds get locked in. Opting for a Single Premium Payment exposes individuals to the potential impact of extreme market conditions. The recent pandemic has resulted in increased market volatility and heightened economic uncertainty. However, by choosing to pay regular instalments, the concept of rupee cost averaging comes into play. Spreading the larger sum across a period helps mitigate the effects of market volatility and provides a level of safety.

6. Tax Benefits:

Under the Income Tax Act, Section 80C offers a tax advantage of up to Rs 1,50,000 on the annual premium paid towards a life insurance policy. This tax benefit applies to both Single Premium and Regular Premium policies, as there is no differentiation in the provision. However, when you make a Single Payment for your life insurance policy, you can only avail of the tax benefit for that particular year. On the other hand, if you opt for Regular Premium payments, you can enjoy the Section 80C tax benefit throughout the payment term of your insurance policy.

Should You Consider Buying a Single Premium Life Insurance Plan?

The Single Premium Payment Plan may not be suitable for everyone and is typically preferred by individuals who have received a sudden lumpsum amount through a gift or inheritance. If you find yourself in this situation and already have sufficient investments to meet your financial goals, and you prefer not to invest the lumpsum in the market, then considering a Single Premium Payment Plan may be an option. With this plan, you will not have to make regular future payments for life insurance until the term ends.

Additionally, the Single Premium Payment Plan could be suitable for business owners, self-employed professionals, freelancers, and similar individuals who may be experiencing current financial success but have an uncertain future income. For them, obtaining life coverage while having a sufficient amount in hand can be a wise decision. If the future holds uncertainty, it may become challenging to afford regular premium payments.

However, salaried individuals who receive a fixed monthly income may find that the Single Premium Life Insurance Plan is not the most suitable choice. Instead, Regular Premium Payment Plans with monthly or yearly frequencies tend to work best for most individuals.

Final words:

While the Single Premium Life Insurance Plan offers convenience in providing financial protection for your family, it may not be the most cost-effective option. Moreover, this plan may not be suitable for the majority of individuals as it requires a lumpsum investment upfront. On the other hand, a Regular Premium Life Insurance Plan can offer several benefits. The premium payments are affordable for everyone, and you have the flexibility to personalise the policy by adding suitable add-ons or riders or increasing the sum assured to align with different stages of your life. Furthermore, to ensure timely premium payments, you can opt for a standing instruction facility that automates the payments on the due dates.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.