Single or Regular Premium, Which is Better?
Vinay works for a tyre industry in Hyderabad. He is in his mid 30s and is planning to buy a life insurance policy. He is expecting a lump sum amount from a deposit account that matures in few months. Currently he is in a dilemma whether to go for single premium policy or the one that has regular premium. What should he do now?
In a very general perspective the choice to pay premium will be based on the income type of policy holder, the commitment level of the policy holder towards the policy and also the additional benefits that the policy offers to him/her.
Premium and sum assured: Usually for a life insurance policy that is spread for long terms (5, 10 or 15 years), the premiums will be spread over the period. There will be an option to choose the number of years for premium payment too. In this sense the premiums for regular payment can be spread for first few years for a particular amount as sum assured (say 3 lakhs). When this is done the premiums will be considerably less as compared to one time premium payment.
Additional benefits: As compared to single premium payment regular premium payment has higher additional covers available. These are called riders and cover against accident, illness etc.
Taxation: From the perspective of taxation regular premium payment looks to be more advantageous. The policy holder can claim tax exemption for the amount he pays towards sum assured to cover life. On the other hand single payment of premium usually is preferred by people who go for ULIPs from investment perspective. In this case the tax laws do not provide exemptions for returns from the policy apart from the amount of life cover. Secondly single premium is just one time premium payment and hence tax return can be filed for just one year.
Flexibility: With the option to top up a policy by paying lump sum a regular premium policy can be made use in the best possible way. This is a bit more advantageous than buying new policy with single premium payment. This facility is not provided for all policies but wherever it is provided the pay is worth it.
Considering all the points mentioned above single premium plans are yet opted by many people in the market today. One of the major reasons for this is that people today lack discipline in financial savings. Single premiums are hassle free in a sense that the policy holder need not have to be aware of the due date to pay regular premium.
Nevertheless, when there is a windfall and you are in the receiving end of a onetime payout, as in the case of Vinay, a single premium policy can work well.
One of the endowment assurance products of LIC is considered and a comparison is made in this illustration. Consider the age of Vinay to be 36. If he opts for a policy that has sum assured to be Rs 5,00,000 and term to be 10 years then the resulting premiums as per calculation will be as follows.
If Vinay chooses 6 years as his premium payment term then
- Premium for yearly payment = Rs 84,770
- Premium for half yearly payment = Rs 42,818
- Premium for quarterly payment = Rs 21,625
- He would pay a total of Rs 5,08,620 as premium if he goes for yearly payment.
- He would pay a total of Rs 5,13,816 as premium if he goes for half yearly payment.
- He would pay a total of Rs 5,19,000 as premium is he goes for quarterly payment.
- The policy offers Rs 50 per 1000 Rs of sum assured after every year of survival of policy holder.
- For the same condition if Vinay chooses to pay single premium then he will have to pay Rs 4, 03,625.
If we compare quarterly premium payment with single premium payment Vinay will be paying Rs 1,15,375 extra. If this amount is spread over quarters of the premium payment term it comes up to Rs 4807.25. But as per section 80 C, Vinay can get tax exemption of Rs 86,500 annually that he pays towards life insurance cover. Hoping that tax laws do not change during the term, this exemption can be got for 6 years (premium payment term). For the single premium policy Vinay gets a tax exemption of Rs 1,00,000 for the first year when he pays his single premium. In this sense regular premium payment for this particular policy looks to be more beneficial.
Contributed By: Aruna Sharma
Mrs. Sharma holds a Masters in Financial Management from University of Mumbai. She has graduated from the University of Mumbai.