Single premium policies are for people without regular income

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In the past year, single premium life insurance policies have seen significant traction. Data from the Insurance Regulatory and Development Authority of India (Irdai) show that in September, individual single premium saw new business collection at Rs 3,098 crore, up 52 per cent year-on-year (y-o-y). This has been a trend in FY18. In the first two quarters, new business premium in this segment grew 26 per cent to Rs 12,831 crore, against Rs 10,180, a year ago. Demonetisation and a push by life insurers were primarily responsible for this growth.

Vighnesh Shahane, chief executive officer and whole-time director, IDBI Federal Life Insurance, says: “We are targeting single premium because there is a big market of investors who want to pay their premium in a lump sum. Also, these policies give us top line (revenue) growth and are profitable products.”

Pankaj Mathpal, founder and managing director of Optima Money Managers, says: “Two things have worked in favor of single premium plans — low charges compared to regular premium plans and no need to regularly worry about dates for premiums. Many could even be buying it as an investment product.” The costs, such as policy administration charge and premium allocation, are lower compared to traditional ones. 

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.  

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