Simplifying Life Insurance in India
Difference between Single Premium vs Regular Premium Life Insurance
To avail the benefits of an insurance policy, you are required to pay an amount to the insurer. This is referred to as the premium. The payment mode of premium comes with an adjustable frequency – you can either make a lump sum single premium payment or pay a premium amount periodically for a specific period.
Each of the payment modes has its own set of advantages and disadvantages. Let’s discuss single premium vs regular premium in detail.
Differences Between Single Premium and Regular Premium Life Insurance Policy
Let’s do a comparative analysis of the two types of premium payments to show their benefits and drawbacks.
| Parameter | Single Premium Policy | Regular Premium Policy |
| Expediency | Requires a one-time lump sum payment. | Requires periodic and timely payments |
| Affordability | Requires you to make a comparatively high amount of investment | More affordable as the total premium amount gets distributed over a period of time |
| Return on Investment | Comparatively lower due to the inflation factor | Higher |
| Customisability | Requires a payment of a set amount | Premiums can be customised |
| Risk | Riskier as it is a one-time investment | Comparatively less risky if we factor in rupee-cost averaging |
| Tax Benefit | Tax benefits can be availed only once up to the tax limit for that year | Tax benefit can be availed on premiums paid every year |
1. Expediency
Paying a single premium might work out the best for some people; however, some might prefer making regular premium payments. With a single premium, you make a lump sum payment at once. If you make a regular payment, you have the responsibility to make timely payments at a fixed interval. Missing out on one payment can lead to the cancellation of the policy.2. Affordability
The frequency of your premium payments depends a lot on your current financial situation and future planning. If you can accumulate a lump sum amount for a single payment of premium, this option can work out fine for you.
It might disrupt your budget for the rest of the year or for a few upcoming months; however, you won’t be burdened with the worry of making periodic payments.
Salaried individuals may find the regular payment option more suitable as the total premium amount gets distributed over a specific tenure, which does not upset the regular cash inflow and outflow. Also, with modern options such as ‘auto-debit,’ defaulting in regular payments might not be a problem.
3. Return on Investment
If you opt for the regular premium option, the premium amount gets spread across a longer tenure. Although the burden gets lowered, single premium policies cost less than regular premiums.
Have a look at this example for better understanding.
Suppose Karan has to pay an annual premium of ₹5000 for 10 years for a sum assured of ₹1,50,000. Now he has to pay a total premium of ₹50,000 over the tenure. However, the insurer offers him the option to pay a lump sum premium amount of ₹40,000. This helps him save ₹10,000.
However, if we take inflation into account while doing this calculation, the scenario will be a little different. With a rate of inflation at 6%, the value of ₹40,000 will be ₹ 86,517 in the next 10 years. From this perspective, the single premium option seems like a loss. Therefore, you must take inflation into factor while deciding upon a payment mode.
4. Customisability
A single premium policy lets you pay the entire premium amount upfront at once. But with a regular premium policy, you will have to pay premiums over the years, which provides you with the added advantage of customising your premiums at any time.
For example, if you add riders or increase the sum assured amount, it will change your premiums because you availed added benefits. With a single premium payment, this customisation might be a little bit tricky.
5. Risk
Insurance is a long-term investment. Hence, if you make a single premium payment, your money gets locked in for a specific tenure. This makes your investment open to market volatility and its adverse effects.
However, with regular payment, you can take advantage of ‘rupee cost averaging,’ which is the process of averaging the cost of investment during different investment cycles, which shields your investment from market volatility.
6. Tax Benefit
You can avail certain tax benefits if you purchase life insurance or general insurance policies. As per the Income Tax Act, 1961, Section 80C, you can avail tax deductions of up to ₹1,50,000 on the yearly premium paid towards your insurance. However, the tax benefits depend on the prevailing tax regime.
However, if you make a one-time payment, you can avail this deduction only for that particular financial year when the payment is made. Hence, if you pay premiums periodically, you can take advantage of this deduction till the end of the policy tenure.
The choice between single premium vs regular premium entirely depends on your affordability, convenience and your financial goals.
Frequently Asked Questions
Is there a chance of a single premium policy lapsing?
What can be the maximum tenure of a single premium insurance policy?
Why do policy premiums vary from one individual to another?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
