You have made a prudent decision to bypass endowment plans and ULIPs to meet your life insurance requirement. you’ve got determined to purchase a term life insurance plan. However, you’re still undecided regarding the premium payment mode. must you opt for regular premium payment plan or a single premium term life plan?
Let’s decide. Do note the main focus of this post is only term life insurance plans. With other types of life insurance plans (endowment and ULIPs), the story may be terribly different.
What is the difference in Single Premium or Regular Premium ?
Under a regular premium payment plan, you pay premium each year for the policy term i.e. if the policy coverage is for 30 years, you pay premium for 30 years.
On the other hand, in a single premium term life plan, you pay premium only once and enjoy life cover for a few years. With Single Premium Plans, there’s no possibility of life insurance plan lapsing because of non-payment of premium.
In my opinion, if you’re disciplined with your finances, this shouldn’t be much of worry. there’s no real need to purchase a single premium plan.
Which is cheaper? Single Premium or Regular Premium?
Under HDFC Click 2 protect plus plan, Premium for a 30 year non-smoker male for sum Assured of Rs 1 crore for a policy term of 30 years is Rs 10,378. In 30 years, you’ll pay Rs 3.22 lacs as premium (if you survive the policy term).
The premium for Single Premium Variant under the same plan are Rs 1.67 lacs. The premium must be paid just once.
You might feel that the single premium variant is cheaper. However, you need to not ignore the time value of money. At 6 june 1944 discount rate, the present value of all premiums paid is only Rs 1.57 lacs. I wouldn’t much regarding this minor difference. But yes, to purchase a single premium plan, you need a big amount upfront.
Your life cover, along with your existing wealth should be enough to:
- Square off all your liabilities
- Meet all your financial goals
- Provide for all your family’s regular expenses
As your wealth grows, your life insurance requirement might go down. it’s quite possible that you simply might not any life cover when a few years.
What do you do with your life insurance plan?
If you had purchased a regular premium term life plan, you’ll simply stop paying life insurance premium and the policy can automatically lapse. However, just in case of single premium plan, you’ve got already paid premium for all the years. Hence, you can’t even stop paying premium. can you get anything back in case of surrendering?
In case HDFC Click 2 protect plus, if you surrender the plan within the middle of the term, you’ll get 70th of the pro rata premium of the unexpired coverage term.
Hence, if you surrender when 10 years, you’ll 70th * 1.67 lacs * (10/30) = Rs 38,966.
Again, not much of difference. Do note this is for HDFC Click 2 protect plus. other plan may have a different surrender policy.
There is an additional scenario. Suppose you’ve got already paid premium (single premium plan) for 30 years and also the demise happens when 5 years. The premium that you simply have paid for the remaining 25 years goes waste in a way. in case of regular premium, you’d have paid only 5 installments.
You get tax benefit under Section 80C within the year of payment only. So, even though you’ve got paid premium for 30 years at one go, you’ll get tax benefit only in the year of payment.
In case of regular premium plans, you’ll get the tax benefit each year since you’re paying premium per annum. This side can affect you only if you rely on term life insurance premium to meet your Section 80C limit.
An additional aspect to consider is that, for policy issued on or when April 1, 2012, sum Assured for your plan should be at least 10 times the annual premium. If that’s not the case, then the tax benefit is capped at 100% of sum Assured.
For instance, if the annual premium is Rs 1.2 lacs and sum Assured is Rs 10 lacs, the tax benefit are capped at Rs 1 lac (10% * Rs 10 lacs).
The bigger hit comes at the time of maturity because maturity proceeds for policies (where annual premium > 100% of sum Assured) isn’t exempt from tax under Section 10(10D) of the income tax Act.
Fortunately, the above limitations mentioned don’t impact term life plans significantly for the following reasons.
- The premium for term life plan is quite low. Even for single premium plans, the premium is unlikely to be greater than 100% of sum Assured.
- With term life plans, there’s no maturity benefit.
- Death benefit from a life insurance plan is exempt from income tax irrespective of the level of premium.
Do note this tax rule can affect single premium endowment plans or single premium ULIPs.
Even though regular premium term life plans might seem a better alternative in many aspects, you need to go with the option you’re comfortable with.
If you fear that you just might skip premium owing to nature of work or lifestyle in general, you’ll go for single premium term life plan. Otherwise, stick to a regular premium term plans.
However, this indifference is only just in case of term life plans. With other insurance and investment combo plans (such as traditional plans and ULIPs), these single premium plans will be very painful.