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People in this world care for their loved ones and are always worried about their well-being. They want them to be financially secure in the event of any unfortunate happening to the breadwinner of the family. The best way this can be ensured is to purchase an insurance policy that pays death benefits to the dependents. The policy can be purchased by paying a regular premium every year or the premium can be paid as a single lump sum amount. In single premium life insurance, the policyholder pays lump sum money upfront for guaranteed death benefits.
On payment, the person becomes the owner of a policy with certain death benefits. They don’t have to worry any further and all the major insurers provide a single premium life insurance policy for the benefit of customers. Before selecting a single insurance policy a person can study the policies available and select the ones which suit them the best.
We will study the pros and cons of a single premium policy-
Pros-
- The insurance premium is paid upfront and you don’t have to worry about it every month or year, unlike a regular plan where the premium is paid till the end of the tenure.
- The single premium policy is valuable because you don’t have to worry about the policy getting lapsed due to non-payment.
- Once you purchase a single insurance premium policy, it is valid till the end of the tenure and is like an asset you have created. You can use the policy as collateral to avail of a loan.
- The single insurance policy has similar benefits to a regular insurance policy where you earn bonuses and other benefits at regular intervals.
- The premium paid under the policy is eligible for tax deduction under section 80C of the Income Tax Act and the sum assured is exempt under section 10(10D) of the act. You get an exemption of up to Rs 1.5 lakhs when you invest in this policy and the sum assured is tax-free. In case something happens to you the beneficiary would receive the benefits tax-free.
- The single insurance premium is suitable for persons who have a seasonal job or business. Those persons who do not have an assured source of income can opt for single insurance plans like the consultants who work on a contract or assignment for a short period of time.
- In case of an inheritance, a person can opt for a single insurance premium when they receive a large amount of cash. If they do not wish to spend this money immediately and are worried about the stock market volatility, they can opt for this policy.
Cons-
- The policy requires a large sum of money to be paid upfront. This might upset a person’s budget for a particular year. In the regular payment plan, the premium payment is spread over a number of years which can be planned in a regular budget.
- When you purchase a single premium insurance policy you get tax exemption for that particular year. The next year if you want tax exemption again you will have to take another policy.
- It can be costlier if the person expires before the completion of the tenure of the policy. Suppose a person pays a premium of Rs 50,000 in a single premium policy and comparing this to if he has to pay the same premium in 10 years and dies in the sixth year. In the regular premium plan, he would have paid a premium of 30,000 while in a single premium plan, he would have already paid Rs 50,000. The death benefits would be the same in both cases. In this case, there is a loss of premium amount which would have otherwise not been paid.
- The payment of regular premiums inculcates financial discipline where you plan and know the fund position in your budget.
- For the salaried person, the regular premium plan is considered better where it is easier to service the yearly premium.
- The single insurance premium policy is more exposed to market risk. If you decide to invest in ULIP the lump sum is invested in the market and may not be protected against the risks. In regular ULIPs, small amounts of money are invested at regular time intervals and the gains and losses get averaged.
We have studied the pros and cons of taking a single insurance policy. A person should prepare a suitable plan of action before taking any decision and the saving and investment portfolio should be diverse. The terms and conditions of the plan should suit the needs and the cash flow situation. Regular premium plan can be considered if you wish to invest for longer periods like say 20 years in an insurance policy, while single premium can be considered for shorter period. If you are salaried person with a family then regular insurance may be a good choice and if you receive a windfall then single insurance can be a good choice.