Tax-saving season is underway. You must already be exploring ways to save income tax under Section 80C of the Income Tax Act. And when the discussion on tax-saving products is on, life insurance plans will invariably come up. After all, the premium paid to keep life insurance plans in force is eligible for tax benefits under Section 80C of the Income Tax Act.
Life Insurance Plans come in many variants i.e. term life plans, traditional plans and unit linked insurance plans (ULIPs). Even these variants come in multiple sub-variants. One of the classifications is based on the frequency of premium payment. On the basis of frequency of premium payment, these plans can be classified in to single premium, regular premium and limited premium payment plans.
Under single premium plans, you pay premium just once. Under regular premium payment plans, the premium payment term is same as term of the life cover. Under limited payment term plan, the premium payment term is less than the term of the life cover.
In this post, I will discuss Single Premium Payment plans in detail. I will also discuss pertinent income tax rules that might influence your decision to purchase such plans.
What are Single Premium Life Insurance Plans?
As the name suggests, under single premium insurance plans, you pay premium just once and get the life cover (and investment benefits, if any) for many years.
So, you pay the premium just once and enjoy life cover for many years.
Unit linked insurance plans (ULIPs), traditional life insurance plans and even term life plans can come in single premium variants.
Everything else is same in Single Premium Plans as compared to regular and limited premium payment life insurance plans.
Advantages of Single Premium Life Insurance Plans
You don’t have to pay premium every year. So, the policy cannot lapse due to non-payment of premium. Drawing parallel from a popular Hero Honda Campaign for good mileage, Single Premium plans are “Fill it, Shut it , Forget it” insurance plans.
However, if you are disciplined with your premium payments, I wouldn’t worry about this issue.
In my opinion, there is nothing special about these plans.
Some argue that the single premium plans are good places to park lump sum funds. I don’t subscribe to this opinion. There are many better and simpler options available.
If you see single premium insurance are at the end ULIPs, traditional plans or term life plans only. So, the issues I have highlighted with ULIPs and traditional life insurance plans in many of my previous posts still remain. Just the fact that you have to pay premium just once does not change that.
In fact, Single premium plans, due to their nature, face a significant tax problem. Let’s see what these tax issues are.
Income Tax Rules for Life Insurance Plans
As per Section 80C of the Income Tax Act, for the life insurance policies issued on or after April 1, 2012, the maximum tax deduction is capped at 10% of the Sum Assured.
An additional relaxation of 5% (i.e. up to 15% of Sum Assured) is available to person suffering from disability or severe disability (as specified under Section 80 U) or to those suffering from a disease or ailment as specified under Section 80DDB. Under a life insurance policy, Sum Assured is the minimum amount assured to the nominee in the event of death of the policy holder.
Hence, if you purchased a single premium plan with Sum Assured of Rs 10 lacs with one-time premium of Rs 5.17 lacs. In this case, you will get tax benefit for only Rs 1 lac (10% of Sum Assured) under Section 80C of the Income Tax Act.
You might be ok with tax deduction. After all, the maximum allowable deduction under Section 80C is Rs 1.5 lacs. Remaining Rs 50,000 will be covered through your EPF or home loan principal repayment or any other 80C investment.
The bigger issue is with the maturity amount. If the premium paid does not meet the above criterion (Life Insurance Premium <= 10% of Sum Assured), the maturity proceeds are not exempt from tax as per Section 10 (10D) of the Income Tax Act. In other words, if the Sum Assured is less than 10 times the premium (annual or one-time), the maturity proceeds are not exempt from income tax. There will be some relaxation (as mentioned earlier) if your case falls under Section 80U or 80DDB.
The only exception is in case of demise of the policy holder during the policy term. Proceeds from life insurance plan arising due to death of the policy holder are exempt from tax irrespective of the level of premium.
The maturity proceeds will be added to your income during the year and taxed as per income tax slab. For those who were under the impression that maturity proceeds of all life insurance policies are exempt from tax, this might come as a shock.
How does this tax rule affect Single Premium Life Insurance Plans?
This is a double whammy for single premium life insurance plans.
Owing to the nature of single premium plans, you can expect the premium for such plans to be reasonably high. It is quite likely that you won’t be able to meet the condition (Sum Assured at least 10 times premium). Hence, the maturity proceeds will not be exempt from tax.
Not only do you get lesser tax benefits (under Section 80C) but the entire maturity proceeds are taxable.
Let’s consider an illustration. I have considered a term plan, a ULIP and a traditional plan for a 30 year old.
You can see term life plans are still safe. Firstly, Sum Assured is even now a higher multiple of single Premium. Secondly, there is no maturity value attached with term life plans. Hence, there is no question of taxing maturity proceeds.
But single premium traditional plans and ULIPs have problems. Tax benefit under Section 80C will be limited to Rs 1 lac in the two cases. Maturity proceeds from the aforesaid traditional plan and ULIP won’t be exempt from tax.
Must Read: Entire life insurance premium is not tax deductible
IRDA regulations for Single Premium Products
As per IRDA Linked Insurance Products Regulations, 2013, for a single premium ULIP, the Sum Assured shall be at least 1.25 times the single premium (age < 45 years). For age equal to or greater than 45 years, the minimum Sum Assured is only 110% of Sum Assured.
You can see minimum Sum Assured can be as low as 1.1 times the Single Premium.
For the maturity value to be exempt from income tax, Sum Assured needs to be at least 10 times single premium.
In case of ULIPs, the commission to the intermediary (agent) is capped at 2% of the single premium as per aforesaid IRDA regulations. This is a positive point about single premium insurance products. The commissions for non-single premium insurance plans (regular premium plans) are much higher. Here is another example of mis-selling where a two year premium payment plan was sold to customers (instead of a single premium plan) just to earn higher commission. Single Premium Payment plan was cheaper.
For traditional life insurance plans, the minimum Sum Assured and the commission structure is similar to those of ULIPs (IRDA Non-Linked Products Regulations, 2013).
Cases of Mis-selling: Single Premium Plans are not for the elderly
Many a times, single premium plans (especially single premium ULIPs) are pitched as fixed deposits which offer returns better than a fixed deposit, offer tax benefits and provide life insurance too. This is especially true when the equity markets are on the uptrend. Just like fixed deposits, you have to invest just once. A number of people fall for the trap.
You will be told that the maturity proceeds will be exempt from tax. Either the agents are themselves not aware or are just playing too smart. But now, you know the truth.
Why does it happen? Simple. Commissions. As mentioned before, commissions for the single premium plans can go to as high as 2% of the premium. On a premium of Rs 8 lacs, the agent or any other intermediary can net as high as Rs 16,000.
Since a number of us visit bank branches for opening fixed deposits, beware of bank officials. Even they sell such insurance plans.
Must read: Why banks are the worst places to seek financial advice?
Retired citizens (senior citizens) don’t really need life insurance (well, most of them). The earning phase of their lives is already over. In any insurance and investment combo product, a part of premium goes towards mortality charges (for life cover) and the remaining is invested.
Mortality charges go up with age. So, the older you are, greater the mortality charges and less the amount left for investment. Add to this agent commissions and various other types of charges. If you are purchasing such plans, be prepared for low returns.
No better example than this retired person whose Rs 50,000 turned to Rs 248 in five years. For more details, read this Mint story: How to shrink Rs 50,000 to Rs 248?
PersonalFinancePlan Take
You must keep your insurance and investment needs separate. I have said this many times before.
Term life insurance plan is the best form of life insurance. Based on your family structure, you can also opt for Income Replacement Term Life Plans.
Traditional life insurance plans are toxic and must be avoided at any costs.
Unit Linked Insurance Plans are a much improved lot (over ULIPs of the past decade). However, I prefer a combination of term life plan and mutual funds over ULIPs.
Be aware of the income tax rules if you plan to invest in insurance products (with investment benefit). Maturity proceeds of single premium plans will most likely be taxed.
Stay away from single premium life insurance plans (unless you are purchasing a single premium term life plan).
Image Credit: Moolanomy, 2012. Original Image and information about usage rights can be downloaded from Flickr.com
54 thoughts on “The Problem with Single Premium Life Insurance Plans”
The maturity value of single premium traditional plan is taxable or not?
Age:48
Sum assured: 2,10,00,000
Premium: 1,00,00,000
Term: 25 years
Premium was Rs 1 crore. Sum Assured is Rs 2.1 crores.
The maturity amount is taxable.
I purchased Single premium policy in Jan. 2011 for Rs. 4,50,000/-.The money invested was Tax Paid money. Sum assured is Rs. 6,50,000/-
I want to know is it correct?. Does the Tax Paid invest again attracts Income Tax. I am in 30% slab pay 31% Income Tax of my earning.
Is the amount added only taxable or the entire receipts against the policy is Taxable. I want to encash the policy now in premature position only.
Looking for guidance, as I am unable to understand the double Taxation.
Dear Sir,
I understand your concern.
Seeing the same money getting taxed twice is likely to put anyone off.
From taxation viewpoint, it does not matter if you invested pre-tax or post-tax money. Income Tax Act does not differentiate on this basis.
Many readers have raised the same issue before. I checked Section of the Income Tax Act quite a few times to see if there was a provision to avoid tax at maturity in such cases. I couldn’t find anything.
However, I am not a tax expert. You can check with a Chartered Accountant too.
The entire receipt will be added to your income for the year and taxed as per your income tax slab.
Btw, double taxation is not uncommon. NPS is a classic example.
Can the issue be taken up with the Government?. Who shall be the right agency to take up the issue-Insurance Companies or suffering Individuals or both, and whome to contact.
Kindly send reply at my e mail id vijayengrs44@gmail.com.
Thanks
Vijay Kumar Dadoo
Dear Sir,
Am sure there must be ways to take the issue up with the Government.
However, I am not aware of the right forum to do this.
You may talk to a Chartered Accountant (CA). He may be able to guide you better.
Sir,
Can you please let me know about jumbo insurance provided to high net worth individuals. Kindly throw some light on the features of such insurance products.
Would be of great help.
Thank you.
Dear Hemant,
Do not have much knowledge about such plans.
As I understand, there are insurance plans especially structured for HNIs. For instance, cover may be larger than typically offered.
In that case, a lot will depend on what you are looking for.
Please forward the name of the plan. I may be able to put a post around such plans.
Sir,
can you please let us know about jumbo life insurance products and their features.
Sir
But what exactly is the rationale behind this taxation on maturity proceeds or surrender values of insurance policies?
Please correct me if I am wrong. From what I understand, if I made an investment of 1 lac in ULIP in FY 2010-11, and I surrendered it in FY 2015-16, the proceeds being 1.2lacs, then I get taxed on the entire amount which gets added to my income from other sources. However, if I had invested the same amount in a fixed deposit or even a mutual fund, I would have been taxed on the income only i.e. 20K (0.2lacs) either by way of interest income or capital gains. Then why penalize the taxpayer by making the entire proceeds taxable? Isn’t this a bit flawed?
Will appreciate if Mr. Raghaw or a practicing CA can clarify.
Just wanted to clarify, in my example, I am talking about a single premium ULIP of 1lac with SA 1.25lac.
In that case, surrender value will be taxed.
Dear Mr. Rowchowdhury,
Maturity or surrender proceeds are mostly not taxed. These are taxed only if the annual premium is greater than 10% of Sum Assured.
About your specific case, your surrender/maturity proceeds will be taxed only if the annual premium is greater than 10% of Sum Assured.
Otherwise, surrender or maturity proceeds are tax-free.
The Government has structured this tax incentive to encourage purchase of life insurance.
Just that single premium plans are more investment than insurance.
Personally, I am happy with the rule. I don’t like people mixing insurance and investment.
So, I don’t think law is flawed.
So, in this case, where one has paid a single premium of 1lac (80% of SA 1.25L), maybe 5 years back, which is > 10% of SA, the entire maturity amount of let’s say 1.10L is taxable and gets added to your income? So, you’re getting taxed on your own money which was invested and just not the income on it. Isn’t tax supposed to be paid on income. Do you really think it is right? It is like penalizing the tax payer for making an investment in an insurance product instead of a TD where I would have been taxed only on the interest income. This is also double taxation because one would have paid tax on the premium money (1 lac) in the year earned it.
Dear Mr. Rowchowdury,
Flawed was the intent of the agent or insurance executive who didn’t explain the tax implications to you.
That was deliberate.
Infact, you were eligible for tax benefit to extent of Rs 15,000 (and not Rs 1 lac) under Section 80C.
Insurance products typically face a very benign tax regime.
For instance, if you purchase the right insurance product, even maturity proceeds are not taxed.
FD investors can complain that they have to pay tax on interest income.
All life insurance products get you some tax benefits. Only 5-year FDs get tax benefits.
In any case, no point arguing over this.
The key takeaway should be to avoid such products in the future.
Yes, I completely agree about the malicious intent of the insurance agent to the extent of not explaining the tax implications to the investor.
However, I think the very fact that the principal invested is being taxed along with the gains during maturity or surrender is flawed and that’s where the problem originates. I wanted to specifically hear your opinion about this basic issue which leads to double taxation. The fact is, because of this, a salaried person like me would have paid tax on the invested amount when he or she earned it and then again would have to pay tax on maturity of this investment on the same amount. I would really like to know whether you see a problem with this or not.
Hi
1 Lakh premium for 5 years from 6th year onward Rs.1,68,345 till 10th year. (pay for 5 yrs and get back for 5 yrs). Life insured for these 10yrs. Will 10D is available here? or is there any tax. I want to take this scheme.
What is the Sum Assured?
I have taken LIC Jeevan Tarang single premium policy of 3 Lakh for 10 years for
single premium amount
223500 in 2006, today I got 125100, and 16500 SB due every year till age 100, whether it is taxable. today and there after and the amount of tax
Amount received this year and in the future years is taxable as per your income tax slab.
Reliance policy taken in the year April 2010 for Rs.5,00,000 by paying single premium. In the March 2016 surrendered policy for Rs.4,00,000. Is it taxable.
Reliance policy taken in the year April 2010 for Rs.5,00,000 by paying single premium. In the March 2016 surrendered policy for Rs.4,00,000. TDS has been deducted and reflected in the 26AS…Is it taxable???
Taxable if the Sum Assured was less than Rs 25 lacs.I think it was.
Insurance companies deduct TDS only when the proceeds are taxable.
Hence, surrender value shall be taxed as per income tax slab.
If you purchased a policy of single premium n don’t claim any benefit u/s 80C and policy of 7 lacs give you a cover of 12.5 lacs. On prematurely surrendering you get a redeption amount of 10,42,000/- after remaining invested for more than five years.
If redeemed prematurely, you are taxed on the entire proceeds. It is a well settled law that a taxed amount cannot be retaxed, then why this anamoly.
Secondly the amendment in this respect was brought in 2012, whereas the policy was taken prior to the amendment, the prospective policies should be covered under the amended provision n the amendment should’nt have the retrospective effect. For instance the case of Vodaphone, where the apex court has held this view !
I would like your considered views on this issue.
Dear Mr. Wasson,
I am not a tax expert. Hence, will not get into principles of taxation in general and retrospective taxation in particular.
I understand your viewpoint. Taxation at maturity is tantamount to double taxation.
I have a few observations.
1. Double taxation is not uncommon. NPS is a classic example. If you invest beyond a point, you invest from post-tax income and maturity proceeds get taxed (even after some relaxation in last budget). Annuity income gets taxed too. Same applies to immediate annuity plans.
2. Whether you took tax benefit under Section 80C for investment is immaterial. Income Tax law does not differentiate based on this.
3. About double taxation, I can see it is a big shock to investors. I tried to find something in Section 10. Could not see any clause that could help save tax in such cases. This can also be attributed to my limited understanding of income tax act.
Suggest you consult this issue with a good Chartered Accountant too.
I have 50,000 Rs.And i want life insurance.My B.D.is 23-01-1968.
which plan is better.
If you need life cover, purchase a term life insurance plan.
How would the maturity proceeds from single premium endowment plan (PENSP) in US dollars from LIC International will be treated in the hands of returning indians?
I must clarify that I am not a tax expert. Please verify my opinion with a Chartered Accountant.
Assuming the maturity amount is taxable (does not meet annual premium and Sum Assured ratio criterion), the sum will be added to your income for the year and taxed at the marginal income tax rate.
I am not sure if and how this amount will be taxed in US.
LIC is offering the single premium policies to people, and have no where solved the problem of Double Taxation. THis, read together with the comments from CA Mr. RAghav, means that all Insurance Companies including LIC are fooling people.
Does IRDA or the Government never consider these issues raised by the common citizens?
Dear Mr. Dadoo,
At the outset, I must clarify I am not a CA.
The insurance companies are selling single premium plans. Nothing wrong about it.
However, the issue is that the taxation aspect is not communicated properly to customers.
I have always felt IRDA is more concerned about agents. Don’t expect much from them.
Hi, Thanks for the article.
I’m thinking of going for HDFC LIfe Clicktoprotect plus with single premium.
Having read from top to bottom of the article and still want t go for single premium because i really don’t know whether i can pay premiums regularly in the future.
I’m not so much concern of taxation thing, i check in HDFC Life website for 1 crore for 26 years, it comes down to Rs 1,81,500 for single premium pay.
You said the mature amount will be taxed, does it means that, with demise of a person with 1 crore term insurance, his family will get less than 1 crore due to taxation ?
Please correct me
Thanks
Hi Karthik,
Relax. No tax issue in case of term insurance plans.
In the event of demise, nominee will get the entire Rs 1 crore.
I have paid single premium for ipru loan protect policy last year. It was for my home loan. Now I am planning to sell my house and foreclose my loan. Will I be able to surrender my policy and claim refund for remaining period.
Dear Sneha,
It depends on your policy terms. Please check the policy document.
Hi sir,
I honour your post as it is very informative for common people without any knowledge on these area. Here are some of my queries where I am unable to find answers and I am confused… Please help ….
1. Is it mandatory to take group cover insurance while opting for loan ?
2. Once policy issued can it be cancelled after free look up period when it is on Single Premium Payment ?
3. Can a policy be cancelled without customer’s consent after date of commencement of the policy ?
4. Can insurance company cancel by themselves after 2 years 7 months, when validity of the policy is for 10 year’s. For example, my policy starts from 18th March 2014 and valid till 17th March 2024. Can my policy be cancelled in between under single premium payment.
My insurance company is not providing correct information, they say it’s cancelled on 6/10/2016. They have never informed us nor i have opted for cancellation.
Please give your valuable advice….
Regards
Alexander Rodriguez
Dear Alexander,.
I have removed your contact number from the post.
As I understand, you are talking about group term plan (or home loan protection plan) that banks try to bundle with their home loans.
1. No. Banks try to force policy upon you but you can say No. Even RBI is against bundling of products.
2. Not cancelled. You can surrender the plan after free-look period is over. You will get a portion of premium back.
3. No. Only if you have not paid the premium or unless you have lied on the application and the insurer finds out). In case of single premium plan, the non-payment of premium cannot be a problem.
4. Same as (3).
Can you please specify the name of the bank and the insurance company?
Have you dropped them an e-mail or merely talked over phone?
Drop e-mail if you haven’t already.
I bought a policy in2010 single premium of 3 lac invested in ULIP & the sum assured is 375000. I got the maturity of 425000 lac & 1 % TDS deducted. what will be tax implications. how amount will be counted as income or it will be exempted.
In my opinion, everything will be taxed.
A few argue that you should get deduction for the premium paid. I am not sure if it work.
You can talk to a Chartered Accountant.
My seven years paying traditional plan but only three years paid of premium amount. Presently not carried out the remaining premium terms, This policy is converted to paid up of policy, its possible or not. If possible, what terms and condition will be followed in this policy. paying amount is 40,000 in per year.
You will have to go through terms and conditions of your plan.
Typically, plans become paid-up after paying premium for 3 years.
Do you know think BirlaSunlife is as good as comparable with other institutions like LIC, HDFC, SBI, ICICI, MAX LIFE, etc. in terms of Insurance services…??
Can’t comment.
New Jeevan Dhara was a Annuity policy of LIC which closed in March 2002.
The policy was sold wherein if the deferment period is more than 10 years the individual could commute the entire NCO.Which would then be tax free.or one could take pension.
LIC does not deduct TDS on the proceeds which are greater than 1 lakh. even in 2017.
LIC confirms it is Tax free.
But my CA is now seeking clarification.
Can you please guide.
Hi !
Just a while received an official mail from LIC manager claims that the policy New Jeevan Dhara if commuted and a lump sum payment is received it is Tax free as the policy was issued before 1-4-2003.I have forwarded the mail to my CA also.hope this will help others also.
I have also seen an nice reply from an CA on another site which gives a detailed reasoning hope it will help other
A C.A. Mr PARAS BAFNA on one site mentions the following some other say something else
1. The amount of commutation of pension is being received from a fund. The income of the fund is exempt under section 10(23AAB).
2. The option of 100% commutation was allowed by the fund referred here in above at the time of issuance of the policy.
3. Section10(10A) is the relevant section dealing with the commutation of pension and taxability of commuted pension.
4. Clause (iii) of sub section (10A) of Section 10 specifically exempts any payment in commutation of pension of pension received from a fund under clause (23AAB) of Section 10.
5. Hence in my opinion the full commutation value, which is being paid by the fund mentioned in para (4) above, is not taxable in the hands of the recipient.
6. Further, Section 10(10D) makes any sum received under a life insurance policy exempt except certain exceptions. The receipt in question is also not covered by the exceptions. Hence the amount received under the life insurance policy is exempt.
Hi Chetan,
Thanks for taking the time out to explain.
I don’t claim to be a tax expert.
But if the entire amount can be commuted (possible only in very old policies. IRDA has changed pension plan rules subsequently), the amount should be exempt. I assume it is not a surrender of plan.
100% commutation beats the purpose of a pension plan.
received surrendered value of single premium bajaj policy rs 100815
premium = 50000
sum assured = 55000
what is tax liability
Please consult a chartered account. I have read multiple treatments about this.
One treatment could be:
Remove premiums paid from the surrender value received.
Pay tax at slab rate on the remaining amount.
ULIP-one of my client has sum assured 125000 purchased on 09-03-2011, single premium paid is 100000 maturity date 03-2021 age 53 and he has surrendered policy on 20/02/2017 and received 161389 after deducting TDS he recd 159775 how will we tax this surrender value and how can we take deduction of prem and whether single prem paid will be allowed in year of payment or spread in life of policy?
Hi Yashmita,
The taxation of single premium plans is a bone of contention.
As I understand, he will have to pay tax on 161389-100000= 61389 at this tax slab rate.
61389 will be reported as income from other sources.
Hi Deepesh , Single premium policies where the premium is more than 10 % or the sum assured is less than 10 times the premium is not fully exempt from tax . But only 10 % of the sum assured is exempt . I had a policy of 15 year term taken in 2013 where the single premium was 100000 ( one lakh ) , the basic sum assured in the event of death 1000000 ( 10 lakh ) and the maturity sum assured 250000 ( 2.5 lakh ) . So will the policy premium taxable . For calculation purpose which is taken , basic sum assured or maturity sum assured. If Maturity sum assured is taken then the tax benefit on premium paid was only 25000 . And when it matures i will have to pay tax on my premium 01 lakh as well as the return 01.5 lakh , is it ….?
Frankly i think the IRDA / insurance companies / agents and the administration are taking the laymen for a ride . These clever bloodsucking vermins are feeding of the hard earned money of common man while fraudsters like Neerav Modi and Mallya roam free ……
Dear Sir,
After a long search I have come accross your very educative articles
GOD Bless you
I am77 yrs old. Financially I am well off as I am drawing sufficient pension. & do not have any liabilities
I wish to gift LIC Jeewan Shanti Policy policy worth Rs 15 lakh to my daughter. She is 38 yrs non working lady having 2 kids The defferment period of the policy would be 12 yrs i.e. she will be 50yrs at the time she will be getting pension. I want her to enjoy the benefits of pension early in life Her eldest kid would be 19yrs. .Financially she is OK..
With this gift no tax will be deducted from my account & she will be benifited also.
One of the other reason for the gift is that ,this amount draws 20% /30% tax on the bank interest earned by me when I file IT return.
Your comments please
Thank you sir!
Yes, that makes complete sense.