Insurance policies are widely accepted as the preferred mode of risk management today. Employers offer them and even government interventions to provide security to the population. Just like there are many different kinds of insurance, we are also familiar with various payment plans of insurance premium, just like monthly, quarterly, annual etc., but it is also possible to opt for a one-time premium payment, known as single premium insurance.
How Does Single-Premium Insurance Work?
When you buy single premium insurance, you would be paying the entire premium in one lump sum amount upfront. The policy provides cover for the specified term period. The death benefit is paid to the nominee should the policyholder happen to pass away during the term, while maturity benefits are paid at the term end, otherwise.
There are many innovations and variants introduced by insurance companies nowadays to suit customers’ unique needs. The single-premium policies are an example of flexibility in premium payment because it tends to be a limiting factor for many buyers.
To illustrate with an example, suppose you buy a single premium term life insurance policy. You have chosen a policy that has a term of 10 years and provides a cover of INR 10 lakh for a premium of INR 80,000.
You will have to pay this entire amount of INR 80,000 at one go. If you had opted for annual premium payment, you would have had to pay every year for ten years. Usually, the one-time amount of single premium policy is smaller than the cumulative premium of a regular policy. In this example, by opting for an annual premium, you would pay INR 9000 every year, i.e., INR 90,000 over ten years. The single premium policy has saved you INR 10,000.
Why should you choose a single premium insurance policy? If you have a good amount of idle money, then this option helps build savings. There are various other benefits which you can see next.
How Single-Premium Insurance Optimally Uses Idle Money
The single premium insurance policy has become the go-to choice for those who can afford the lump sum premium payment and want to park their idle funds while availing tax benefits. Most people choose the life insurance-endowment policies which provide death and maturity benefits, but at higher returns than traditional policies. Therefore, these also function as wealth enhancement policies.
Some single premium insurance policies give the policyholder the option to decide the instruments for investing. They may be equity as in a unit-linked insurance plan or debt as in an endowment plan. Hence, there is a good possibility of earning great returns on idle funds.
Investing in a single premium insurance policy also diversifies the buyer’s portfolio, which minimises the risk exposure. Buying from a reputed institution which is ‘too big to fail’ also keeps the funds secure till maturity.
Tax Benefit
As per the Income Tax Act, life insurance policy premium payments are eligible for deduction from annual income, under Section 80C. However, note the following caveat. The exemption applies only if the premium amount does not exceed 10% of the sum assured (the amount the policyholder receives at maturity before the addition of bonuses). If it is more than 10%, the exemption will only be given up to the 10% amount.
The Insurance Regulatory and Development Authority of India rules that the maturity benefit from a single premium insurance policy is tax-free under Section 10D of the I-T Act. Here also the caution is that the sum assured must be 10 times the premium amount.
This is useful for those who have large funds to buy a single premium policy. An assured sum of even two times the premium may be cheaper but will not bring tax benefit, whereas a policy giving an assured sum at least 10 times will be tax-free. So, you can get higher returns, rather than just let the funds stay idle.
Loan Benefit
Such policies allow optimal use of idle funds in another way. You can avail of loans in the future against the policy while the term period is running (after the 1st year of the policy). Therefore, you can hedge for the future by building an asset out of idle funds, against which you can borrow should you ever need to.
Other Benefits of Single-Premium Insurance
A single premium insurance policy eliminates the hassle of keeping track of regular payment, such as in a monthly or annual policy. It helps regular travelers.
Since the entire amount is paid upfront, there is no worry of the policy lapsing.
It is useful for people who don’t have the regular cash flow or those who may find it difficult to sustain regular premium payments.
It allows last resort tax saving at the end of a financial year.
There are a couple of drawbacks. You shouldn’t have an immediate need for those funds, since you can’t fully access/utilise them till maturity, and you also can’t change the terms of the coverage. Also, note that purchasing life cover is more expensive in single premium insurance. If the holder dies during the term, a higher premium would have been paid for the similar death benefit amount.
However, all risks considered, single premium insurance provides optimal use of idle money with investment advantages and assured care for the beloved nominees.
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