Should you opt for single-premium insurance plans?

5 MinsJuly 16, 2021

You have recently received a lump sum amount and are looking for a tax-effective investment. Have you considered a single premium life insurance plan? It offers the benefits of insurance such as life cover plus tax savings. But how does it compare with a regular life insurance plan where you have to pay premiums for a fixed number of years or till the maturity of the plan? Let us understand how a single premium insurance plan works.

single premium policy

What is a single premium insurance plan?

A single premium life insurance plan is one where the policyholder makes a lump sum payment to enjoy life cover for the entire tenure of the plan. It takes away the stress of making regular payments. All you need to do is make one payment and forget about it until maturity.

It does sound easier to manage. What are the other features?

There are two popular variants - whole life plan and single-premium variable life plan. The difference between the two lies in how each policy accumulates a cash value. While the first one offers a risk-free fixed interest rate, the second one invests the cash value in actively managed portfolios and comes with the risks and potential rewards of active investing.

[Also Read: Know when and how to increase your life insurance cover]

What are the other advantages of this plan?

1.   You don’t have to worry about the policy getting lapsed because of non-payment of premiums. As against this in a regular plan, you have to keep track of the premiums and pay them on time.

2.   Once the premium is paid the single premium plan is valid until the end of the tenure, unlike a regular plan where you have to pay premiums on a monthly, quarterly, half-year or annual basis.

3.   The tax benefits are similar to a regular policy. This means the premium is eligible for a tax deduction under section 80C of the Income Tax Act, while the sum assured is exempt under Section 10 D of the same law.

What are the factors to watch out for?

1.   According to Section 10 D of the Income Tax Act, if the premium on the policy exceeds 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012, the sum received on maturity is subject to tax. In the case of a single-premium insurance policy, chances of the premium amount exceeding 10% of the sum assured are higher. Since it is a one-time payment chances are the premium amount could be high, unlike a regular policy where the premiums are spread over several years, and hence have lower premium amounts. So watch out for this.

2.   Buyers of one-time plans can save tax by paying a single premium but only once in a financial year. If you buy more than one single premium plan, you can get tax exemption only on one policy for that financial year. This means you can buy a new single premium plan every year and take tax benefits.

3.   If the policyholder dies before the completion of tenure, the death benefit could be costlier. Let's assume someone paid Rs 50,000 as a one-time payment for a policy of Rs 20 lakh for ten years. She dies in year seven. If she had opted to pay a regular premium, she would have to pay only Rs 5,000 a year which would have worked out to Rs 35,000, for seven years. The death benefit for the family would still be the same in both cases.

What kind of customers should opt for such plans?

1.   Those who have suddenly come into a large amount of cash, like an inheritance or similar windfall gains

2.   Businessmen who have made abnormal profits in a year

3.   Since life insurance is a long-term product, those who do not have an assured source of income and hence may not be able to pay regular premiums every year may look at single-premium plans. For instance, freelancers or consultants who get paid per assignment or work on a contract for a short period.

Axis Bank has tie-ups with multiple life insurance companies – Max Life, Life Insurance Corporation of India and Bajaj Allianz Life. To check out their plans, click here and calculate EMIs with Axis Bank's life insurance calculator.

Disclaimer: The Source, a Mumbai-based content creation and curation firm have authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.