Single-premium versus regular premium policies: A debate with no definite conclusion

We just came out of the tax-paying season wherein crores of Indians logged in to the Income Tax portal to list their income details and pay their taxes accordingly. Even the country’s parliamentarians are not exempt from this rule. The Ministerial Code of Conduct mandates all the ministers to declare their assets including the earnings and investments by their spouses and dependents every year. Most investors chose the conventional investment options including the purchase of life insurance policies, thus, redirecting our focus to this traditional investment option.

Buying a life insurance policy is a must considering how the suddenness of events may leave your family prone to financial vulnerabilities in case of an untoward happening like death or critical illness. Most people focus only on the insurance payout and the premiums they have to pay while ignoring an essential factor like the frequency of premium payments to be made.

Availing added benefits

Whether to buy a single-premium policy or continue to pay in small bits throughout the policy period has always been a point of debate. This is because most insurance customers try to find the pros and cons of both without realizing that it all depends on the ease of payment. Also, many insurance holders have preferred to pay for single-premium life insurance plans to only avail the financial protection but also benefit from the ease of paying the entire premium amount in one shot while also seeking an associated life cover option.

One-time payment ease

Ease of payment is one reason that most of them have cited while choosing this option. This is not new considering how many people change jobs frequently or are unsure of sticking to their present jobs. The jump from being an employee to entrepreneurship is also a reason for many insurance customers to choose the single premium option over others. As opposed to paying continued premiums throughout the policy period ranging between 10 and 20 years, it indeed makes sense for many to pay the entire premium amount at one time and be done with it. However, this also depends on the customers’ financial abilities and their willingness to part away with such a big chunk at one go.

Cost-effectiveness

Inflation has again raised its ugly head again with products and services costing more now than before. This again lends a point in favour of single-premium policies that remain unaffected by price changes as opposed to the higher premiums now charged by life insurance companies in India. 

Dev Ashish, Founder, Stable Investor says, “A single premium term insurance plan can be a convenient option and help simplify things. Though once you pay the premium and are done with it, you have one less thing to worry about every year. But it may not be practically feasible for everyone. Not many can arrange a large lump sum in one go. I checked the annual premium for a ₹2 crores plain term plan, for a 30-year-old male with a 35-year policy tenure from a large private insurance company’s website. The annual premium comes to about ₹27,000."

“This amounts to about ₹9.4 lakh over a 35-year tenure. But if one was to convert it into a single-premium policy, then you need to pay up ₹4.7 lakh in one go. Very few people can afford to spare that kind of money. Also, if you consider the time value of money, then statistically the regular annual premium mode will turn out cheaper though people don’t see it like that at first. But still, it might have a good use case for those with uneven income like businessmen, self-employed professionals, etc. who don’t have a guarantee about future income and their ability to pay regular premiums for very long,” he added. 

Ashish adds, “Another angle to this is the tax saving that insurance premiums offer. You have a limit of ₹1.5 lakh every year for tax-saving under Section 80C (under which insurance premiums are considered). Paying a bit one-time large premium means you lose on benefits above the ₹1.5 lakh limit. Also, you don’t get any benefits in future years from premium payments as you have already paid it in one shot. But if you have already exhausted your 80C using other options like EPF, PPF, etc., then this is not a relevant factor for you.

We discussed above the simple term plans – which are the best type of life insurance that everyone should be opting for. But if for any reason, you are considering traditional endowment type plans or ULIPs, then you need to be more careful with single premium plans. And that is because of a rule about the exemption of insurance maturity payout under Section 10 (10D). 

Generally, life insurance maturity payouts are tax-free. But this tax-free status is valid only when the premium paid is less than 10 per cent of the total sum assured. So, if your single premium is more than 10 per cent of the total sum assured of the insurance plan, then the maturity amount will be taxed. Death claims still remain tax-free. And since term plans don’t have any maturity benefits, this rule isn’t applicable in their case.

Money matters and that is why many customers are willing to lock their money for a prolonged period. Also, discontinuing policies midway is not in their scheme of things while working on their investment portfolios, thus, explaining their fondness for single-premium plans. There is no need to depend on regular paychecks to pay premiums. Also, since single premium plans are for a short duration only, it suits most who buy them either late or prefer a shorter policy period.

What do the numbers say?

According to the statistics posted by the Insurance Regulatory and Development Authority of India (IRDAI) on its site, many insurance companies have witnessed a jump in the number of people opting for single-life insurance policies. For example, Aviva Life Insurance Company saw a whopping rise in the number of its life insurance customer base by 394.78 per cent. 

Similarly, Bajaj Allianz Life Insurance Company saw a spurt in single-premium life insurance sales by 114.06 per cent. Future Generali Life Insurance customers showed a greater proclivity to pay single premiums as evident from the 286.95 per cent rise in the number of its customers in this segment. In the past year, the share of single-premium policies to the entire life insurance segment has gone up considerably.

Tax benefits

Most Indians fall for investment options that promise them some tax exemptions too. Viral Bhatt, Founder, Money Mantra says, “Under Section 80C of the Income Tax Act, policyholders can avail of tax exemptions of up to ₹1,50,000 on the yearly premiums paid. These tax benefits apply to both single-premium and regular premium policies, albeit with a difference. This is because single-premium policyholders can avail of this tax benefit only once as opposed to regular premium policyholders who get these benefits throughout the entire premium paying term.”

The debate between single-premium plans and regular premium life insurance policies has no definite conclusion. The choice depends on how policyholders perceive these policies depending on their finances and investment goals.