Should you buy single premium insurance plans? These factors will help you decide

Endowment plans and Ulips are promoted as products that meet the twin needs of insurance and investment, besides offering tax benefits. But what if an individual, due to irregular income or lack of financial discipline, cannot meet recurring premium payment commitments? Enter, single premium plans.

There has been a recent spike in single premium policy sales. Private sector insurers registered a growth of 54.75% y-o-y in the individual single premium segment in April-June 2018, even as regular premium business grew just 3.84% during the same period. “LIC remained focussed on single premium with 72% share in total premium in June 2018. The share of single premium for private players increased to 49% from 43% in May 2018,” notes a Kotak Institutional Equities report.

Rising interest rates are a key contributor to this trend. “From a risk management perspective, insurance companies may be willing to price aggressively for single premium products. This in turn makes for a compelling proposition for customers wanting to lock-in these high rates,” says Kailash Mittal, SVP-Actuarial, HDFC Life. This has resulted in increase in single premium plan sales. “The customers have taken note of the LTCG tax angle. Our overall sales growth was 20% y-o-y during April-July 2018, while Ulips grew at 80%.

For us, single premium volumes have been substantial,” adds Ashish Vohra, ED and CEO, Reliance Nippon Life Insurance.

The reasons may be several, but some industry-watchers believe the industry ought to pay more attention to regular premium products.So what should individuals make of the regular vs single premium debate?

Know the costs
Single premium policies are costly. Consider a simple term insurance policy, for instance. A 30-year-old male buying a Rs 1-crore term cover with a tenure of 30 years will have to shell out Rs 1.62 lakh under a single premium plan. For the same policy, the annual premium works out to Rs 9,717. The total premium paid over 30 years under the regular policy would be Rs 2.91 lakh. “However, we need to discount this amount at a suitable rate to arrive at the present value because the premiums would be paid over many years, not all at once today. At 6% discount rate, the present value works out to Rs 1.33 lakh,” explains Amar Pandit, Founder,, a financial planning firm. Thus, a single premium policy is costlier by close to Rs 30,000. “The difference only becomes larger with higher discount rates,” adds Pandit.

Check compatibility
Given the higher upfront premium, it may not be suitable for salaried individuals, who would be better off servicing regular premiums. Those who are not confident of meeting recurring premium commitments, which can lead to the policy lapsing, can look at this option. “Single premium plans are suitable for those who do not have regular cashflows. Also, those who are likely to have relatively short careers can consider such plans,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories. You could also consider these plans if you lack financial discipline but do not want your family to suffer due to your recklessness. This apart, if you land a sizeable bonus or an unexpected lump sum and your evaluation of your life insurance cover throws up a shortfall, you can use the funds to buy a single premium plan and plug the gap.

Beware of the catch
Life insurance advisers have consistently dangled the tax benefits carrot to lure prospective clients, so much so that for many, life insurance is synonymous with taxsaving. Given that the maturity proceeds are tax-free under Section 10D, it is not surprising that life insurance plans top the tax-saving popularity charts.

However, if you are keen on tax benefits, tread carefully. Not all single premium plans are eligible for tax benefits. The reason being the mandate that the premium ought not to exceed 10% of the capital sum assured in any of the years; if it breaches this limit, the maturity proceeds will be added to the taxable income in the year of maturity and be taxed as per the slab rate applicable. This is applicable to policies sold after 1 April 2012. For policies bought before this date, the limit is 20% of the sum assured. “If your maturity proceeds are not exempt under Section 10(10D), then the amount received is subject to tax deduction at source under Section 194DA at the rate of 1%. However, no tax is deducted where the maturity amount is less than Rs 1 lakh,” says Taranpreet Singh, Senior Consultant with tax advisory firm TASS Advisors. In case of the policyholder’s death, this condition is waived and claim proceeds paid to nominees are tax-free.

The tax impact
How your single premium policy’s maturity proceeds will be taxed

Source: TASS Advisors

“The condition for extending tax benefits may not affect term policies as the single premium would usually be in the range 1.5-3% of the sum assured, but this could be a serious limitation for traditional policies where the premium to sum assured ratio is much higher,” points out Pandit. This is particularly important for individuals who want to benefit from the long-term capital gains tax advantage that Ulips enjoy over mutual funds. “Policy buyers should evaluate whether their plan’s maturity proceeds will be tax-free. Else, the purpose of choosing a Ulip over a mutual fund (due to LTCG tax) will be defeated,” says Sadagopan.

The key, therefore, is to read the policy document carefully. “There are policies that offer sums assured of 10 times the premium paid, while others do not. You must study the policy offerings to understand the sum assured multiple before signing up,” says Rakesh Wadhwa, CMO, Future Generali Life Insurance.

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