Single premiums plans, as the name suggests, are those insurance
plans where the policyholder pays the premium once for the enture tenure of the policy. It can be under both traditional and unit-linked insurance plans (Ulips). Such plans have a lock-in period of five to 10 years, depending on insurer and type of plan.
However, understanding the taxation on these policies is important. Single premium policies qualify for tax benefits, both under Section 80C at the time of investment and for making the maturity proceeds tax-free under Section 10 (10D). However, the benefits will continue only if certain conditions are met by policyholders. The tax benefits under Section 80C and Section 10 D will only come if the sum assured is 10 times the annual premium amount. “If the single premium is Rs 1 lakh and the sum assured is Rs 10 lakh, the entire amount would be eligible for tax benefit under Section 80C of the Income Tax Act. But, suppose the sum assured is Rs 5 lakh. Then, only 10 per cent of the premium amount (Rs 10,000 here) would be exempt under 80 C,” added Mathpal.
Many financial planners are also averse to this product for one key reason —- saving on premium. “We don’t suggest single premium plans because if a policyholder is buying a 20-year policy for a sum insured of, say, Rs 5 crore, he pays premium only once. But, if he is paying regular premium for that same policy every year and passes away after 10 years, he will get the entire sum assured by paying only 10 premiums,” said Gaurav Mashruwala, a Mumbai-based financial planner.
Of course, for a person who does not want to pay regularly or does not have regular income, like a film star or people who work on contracts, this is a good product. Otherwise, go for a regular premium product.