Single Premium Insurance Plan

Nowadays people are getting more attracted towards seasonal employment or business instead of regular salary job. In such a situation, they do not know whether they will have the capital to pay regular premiums or not. That’s why the trend of single premium insurance policy has increased a lot. In single premium insurance policy, you do not have to pay premium from time to time. You get rid of the hassle by paying the amount once, so at first sight this policy looks better.

                                                                                                                              Subas Tiwari

A single premium insurance plan is one in which the policy premium is paid only once during the term period of the plan. These plans provide a life cover on payment of a onetime lump sum premium amount.

 How do single premium term insurance plans work?

 As the name indicates, single premium plans are policies that need you to pay the premium just once and never again during the remaining term of the policy and continue to enjoy the cover for the full term of the insurance policy. Obviously, in the case of single premium policies, the premium that you pay upfront will be a larger amount.

Are they good?

• The policyholder thinks that he will pay the premium just once in his life and it’s all done. The thought does have some merit because paying premiums regularly each year calls for discipline. If you miss it, then your policy might lapse.
• For regular payment of premium, you need to have the money in the bank account to keep the policy alive. So paying the premium just once is easy.
• Many investors buy regular premium-payment policies during the tax-saving season (January to March each year) as a tax saving instrument rather than for protection, which is not what insurance is meant to be.
• For people with fluctuating income, this is possibly one of the best instruments available today. Single premium is simply a mode of payment and comes handy for those with shorter career spans.
• People who have made some windfall gains or are sitting on huge investible surplus prefer single premium plans.
• These plans are suitable for those who do not wish to make recurring payments or fear lapse of the policy.
• If you have a sizable amount such as bonus, proceeds from sale of property, etc. and want to invest one time for life cover for a particular term, then this plan would suit you.

What else do they give?

• These are tax savings instruments as the premium paid is allowed as Section 80C deductions. You are entitled for a tax free maturity/death benefit under Section 10 (10D) only if the minimum sum assured throughout the policy term remains 10 times the single premium paid.
• The tax benefit under Section 80 C is available only if the annual premium is at least 10% of the sum assured.
• But to avail tax benefits every year, you may have to buy such policies every year, which is not always practicable.
• Bonus is paid on the declared rate every year, thereby enabling the paid-up value to grow.
• Loan is available against this type of policy either from the Insurance Company itself or by assigning the Policy in favour of the lending institution as security for the loan.

What then are its limitations/drawbacks?

• Many investors feel the pinch when they are told of a host of charges which are loaded on the single-premium policy. So in a way, it acts as a dampener for further investments.
• There are justified objections that such loading of charges offset any growth achieved on the policy and thus erode the paid-up value of the policy, generating genuine concerns of the investors.
• When comparisons are made between them and returns are compared, the case that regular investment options are preferable because they provide more opportunities for greater returns rather than choosing the single premium kind of insurance is strengthened.
• Under Section 80 (C) of the Income Tax Act, to be eligible for IT deductions, you would have to have a policy with a life cover 10 times higher than the annual premium. Thus, you may be required to either change the yearly premium significantly to get that life cover or opt for an altogether a new policy. This is cumbersome to a few, though not difficult to fulfill. For example, if you want to save Rs. 30,000 with your policy, you would have to buy a minimum life cover of Rs 3, 00,000/-.

With the above mentioned criteria, you may also have to choose a policy with a longer tenure, irrespective of whether you require it or not.

 What is in store for the future?

IRDA is bringing out new guidelines to be framed for appointment of Insurance Agents and capping on payment of commissions to insurance agents & reducing the rates of commissions during the first year of the policy & for its renewals from the second year onwards.

The salient features are-

• Insurance Agents will be appointed on a fixed salary structure thereby ensuring and assuring them on fixed monthly income;
• Everyone in the insurance business knows that insurance agents’ commission on the first year’s premium is much higher (sometimes @ 25% & above) and tapers down for each year renewal; now the revised policy will bring them further down not to exceed to an aggregate of 10 per cent of all first year premiums and four per cent of all renewal premiums on policies with deferred annuities. It further suggested that the insurer should be capped at not more than five per cent of premiums received during the year on single-premium annuity products and 1/20th of one per cent of the average of the total sums assured by policies excluding single-premium policies.

• IRDA guidelines further speak of cancelling payment on any upfront commissions by insurance companies to distributors like banks. IRDA also suggested cancelling the system of advance payments to insurance intermediaries. Insurance companies, which are selling their products through bank branches, will then need to come up with a different model.
• The proposed IRDA guidelines, if adopted into law, will enable the common man to hope to get premiums at a low cost since insurance companies would not be spending a huge sum of money on commissions.

As an investor, it is your responsibility to enquire all the details of a product before choosing it. If you have been suggested any insurance plan by your friendly insurance agent, make sure that the agent has your objective as the paramount factor and nothing else.

 Certain variables explained

• Almost all the Insurance companies offering the single premium policy are offering “Surrender Value” after the mandatory 5 years (lock-in period) from the date of the policy.
• Partial withdrawals are allowed under this policy after the completion of “lock-in period” which extends from a minimum of Rs.1000 (only on the policyholder reaching the age of 18 years as on the date of exercising such an option) to a maximum of 50% of the premium paid without interruption during the last 5 years from the date of the policy. A small fee is charged as “surcharge” for facilitating this partial withdrawal.
• There are certain companies which also levy a “miscellaneous charge” to meet the cost of duplicate statement if sought; change in name; change/incorporation of date of birth; addition of contact numbers; and so on.
• Some Companies are offering “top up” on premium to increase sum assured proportionately and this situation could come if the insured is laden with surplus money & want to invest the same in this policy.
• “switching” means that the insured is offered opportunities to switch from one Fund to another under the same Insurance product (like from “dividend” option to “growth” option or from “equity’ to “debt” option or vice versa), which is again subject to availability of such options in the Fund.