You have made a prudent decision to bypass endowment plans and ULIPs to meet your life insurance requirement. You have decided to purchase a term life insurance plan. However, you are still undecided about the premium payment mode. Should you go for regular premium payment plan or a single premium term life plan?
Let’s find out. Do note the focus of this post is only term life insurance plans. With other types of life insurance plans (endowment and ULIPs), the story might be very different.
What is the difference?
Under a regular premium payment plan, you pay premium every year for the policy term i.e. if the policy coverage is for 30 years, you pay premium for 30 years.
On the other hand, in a single premium term life plan, you pay premium just once and enjoy life cover for many years. With Single Premium Plans, there is no possibility of life insurance plan lapsing because of non-payment of premium.
In my opinion, if you are disciplined with your finances, this shouldn’t be much of worry. There is no real need to purchase a single premium plan.
Which is cheaper? Single Premium or Regular Premium?
Under HDFC Click 2 Protect Plus plan, Premium for a 30 year non-smoker male for Sum Assured of Rs 1 crore for a policy term of 30 years is Rs 10,378. In 30 years, you will pay Rs 3.22 lacs as premium (if you survive the policy term).
The premium for Single Premium Variant under the same plan will be Rs 1.67 lacs. The premium needs to be paid just once.
You might feel that the single premium variant is cheaper. However, you must not ignore the time value of money. At 6% discount rate, the present value of all premiums paid is only Rs 1.57 lacs.
I wouldn’t much about this minor difference.
But yes, to purchase a single premium plan, you need a big amount upfront.
What if I do not need life cover after a few years?
Your life cover, along with your existing wealth should be enough to:
- Square off all your liabilities
- Meet all your financial goals
- Provide for all your family’s regular expenses
As your wealth grows, your life insurance requirement may go down. It is quite possible that you may not any life cover after a few years.
What do you do with your life insurance plan?
If you had purchased a regular premium term life plan, you can simply stop paying life insurance premium and the policy will automatically lapse.
However, in case of single premium plan, you have already paid premium for all the years. Hence, you cannot even stop paying premium. Will you get anything back in case of surrendering?
In case HDFC Click 2 Protect Plus, if you surrender the plan in the middle of the term, you will get 70% of the pro rata premium of the unexpired coverage term.
Hence, if you surrender after 10 years, you will 70% * 1.67 lacs * (10/30) = Rs 38,966.
Again, not much of difference.
Do note this is for HDFC Click 2 Protect Plus. Other plan may have a different surrender policy.
There is an additional scenario. Suppose you have already paid premium (single premium plan) for 30 years and the demise happens after 5 years. The premium that you have paid for the remaining 25 years goes waste in a way. In case of regular premium, you would have paid only 5 installments.
However, personally, I wouldn’t worry much about this aspect.
You get tax benefit under Section 80C in the year of payment only. So, even though you have paid premium for 30 years at one go, you will get tax benefit only in the year of payment.
In case of regular premium plans, you will get the tax benefit every year since you are paying premium every year.
This aspect will affect you only if you rely on term life insurance premium to meet your Section 80C limit.
Must Read: Tax Benefits of Life Insurance
An additional aspect to consider is that, for policy issued on or after April 1, 2012, Sum Assured for your plan must be at least 10 times the annual premium. If that is not the case, then the tax benefit is capped at 10% of Sum Assured.
For instance, if the annual premium is Rs 1.2 lacs and Sum Assured is Rs 10 lacs, the tax benefit will be capped at Rs 1 lac (10% * Rs 10 lacs).
The bigger hit comes at the time of maturity because maturity proceeds for policies (where annual premium > 10% of Sum Assured) is not exempt from tax under Section 10(10D) of the Income Tax Act.
Fortunately, the above limitations mentioned DO NOT impact term life plans significantly for the following reasons.
- The premium for term life plan is quite low. Even for single premium plans, the premium is unlikely to be greater than 10% of Sum Assured.
- With term life plans, there is no maturity benefit.
- Death benefit from a life insurance plan is exempt from income tax irrespective of the level of premium.
Do note this tax rule will affect single premium endowment plans or single premium ULIPs.
It is much ado about nothing.
Even though regular premium term life plans may appear a better choice in many aspects, you must go with the option you are comfortable with.
If you fear that you may skip premium owing to nature of work or lifestyle in general, you can go for single premium term life plan. Otherwise, stick to a regular premium term plans.
However, this indifference is only in case of term life plans.
With other insurance and investment combo plans (such as traditional plans and ULIPs), these single premium plans can be very painful.