The benefits of single premium plans

Want to buy an insurance policy, but don't want to remember the due date for payment of premium? Rohan was in such a position. He was looking to take an insurance policy but didn't want to be bothered about remembering the premium due date.

He contacted his insurance agent, who then advised him to opt for a single premium insurance policy. But is it worth going for this policy? Will Rohan benefit by opting for the same? We investigate the matter.

Pay premium once and get covered for the term

As the name implies, in single premium policy, you have to pay the premium only once at the time of buying the policy. However you can continue to enjoy the cover throughout the term of the policy. E.g. if you take a policy with tenure of 10 years, you will continue to enjoy life cover for the 10 years, though you have paid premium in the first year only.

In the olden days, these policies were endowment policies, where you were given big assured returns. So they were more of the investment products than insurance policies. There was hardly any insurance cover, thus they were not actually insurance products. However today the situation has changed, making single premium policies good for some people.

Eligibility criteria for taking this policy:

• You have to take the minimum sum assured of at least 5 times the policy premium. E.g. if your policy premium is Rs. 30,000, your sum assured should not be below Rs. 1,50,000. Moreover you are not allowed to lower the sum assured except in the final 2 years of the policy.
  This is as per the new guidelines laid down by IRDA. The idea behind this condition is to safeguard the customer interest. This is crucial because bigger the sum assured, higher the sum assured for you, thus making it more beneficial for you. Though you can get a sum assured exceeding 5 times the premium amount, most of them limit their products to 5 times the premium.
• The tax benefit offered on the premium paid on the insurance policy is applicable under section 80C, provided the premium amount is at least 20% of the sum assured or if the sum assured is at least 5 times the premium. This rule is applicable even to single premium policies.
  E.g. if the premium of a single premium policy is Rs. 25,000, it must have the minimum sum assured of Rs. 1,25,000 in order to enjoy tax benefit. This condition put a limitation on the single premium policies. Even if the premium is more than 20% of the sum assured, the maximum sum assured is still restricted only to 20%. Also the maturity amount is taxed.

You can go for it if you:

• Don't have a steady cash flow to pay a premium every year.
• If you are a regular traveler, making it difficult to pay your premium on time.
• Availability of lump sum amount.
• If you are a high income earner, you can opt for higher life cover.

While this type of policy is good, you need to watch out for any change in your circumstances. E.g. if you get married or if you become a parent, your insurance need might change, making you opt for higher lie cover. Similarly your designation in the company can change, pushing you in higher tax bracket.

If you opt for this type of policy, you will get tax benefit only in the first year, as you are not paying anything in the subsequent years. So you will need to find out other tax-saving instrument to save tax.

Single premium policy is the insurance policy where you pay insurance only in the first year but continue to enjoy the life cover throughout the entire term of policy. You must get the sum assured of at least 5 times the premium amount in order to enjoy good life cover and save tax.

This policy is suitable for people who travel regularly, who don't want the hassle of remembering payment date or have lump sum amount to invest. However you need to be wary of any change in your circumstances that can affect your insurance requirement.