Dailybhaskar.com | Last Modified - Feb 19, 2014, 04:55 PM IST
By Deepak Yohannan
Sometime during first half of 2012, the Insurance Regulatory and Development Authority (IRDA) was seriously thinking about taking single-premium policies off the market. The revenue potential may have made the IRDA change its mind. Nevertheless, this gave rise to a question of whether single-premium policies were a good idea at all, or whether regular premiums were the better option. Let us look at some of the factors that govern this choice.
A single premium policy is viable only when you have a large amount ready with you that can be channelled into a term plan or a mortgage plan. The advantage is that you need not worry about renewals or paying premiums on time. But can you really afford to part with such a substantial sum at one go? Regular premiums – whether paid monthly, quarterly, half-yearly or yearly – involve smaller and more affordable sums and, hence, are easier on the pocket.
Regularity of income
Regular premiums are ideal choice for salaried folks and others that draw regular incomes; the premium amount can be put aside easily. On the other hand, individuals who depend on an irregular income may be drawn to single-premium plans. However, this necessitates a large one-time payment if one is looking at adequate coverage.
Term life plans provide a sum assured when the insured dies. Regular premiums win out in this respect if the insured dies early into the term, say within three or four years of starting the policy. The deceased’s beneficiaries stand to receive the same sum assured that they would have received in the case of a single-premium policy of the same value; the difference is that, in the former, the full sum assured is received even though the accumulated premium sum is considerably lower than in a single-premium plan. In a pure protection plan, therefore, regular-premium plans score over single-premium plans given the absence of maturity benefits.
A single-premium plan exposes a customer to higher risk. This is because entire sum is invested in one go. In case of a unit-linked plan, the insured can use the plan’s fund-switching ability to protect the investment. However, regular-premium plans are safer in this respect: since your money is invested at different times, the risk exposure is reduced even in a volatile market.
In case of life insurance, a regular-premium plan is eligible for tax benefits throughout the premium-paying term. Meanwhile, single-premium plans allow you to make tax-free withdrawals under Sections 80C and 10(10D) provided that the life cover is five times the premium amount. However, the tax deduction can be availed of only once in single-premium plans.
Unlike most single-premium plans, the regular-premium plan usually comes with additional features such as payouts in case of accidental death or critical illness. Many regular-premium plans also include a waiver of premium rider. Depending on the type of plan, you can even make withdrawals or take a loan against the cash value of your plan. A single-premium policy may offer you access to higher amounts, but either through a loan against the policy at high interest or by surrendering the plan (and hence, the coverage) for a substantial exit cost.
When you weight the pros and cons, regular-premium policies are the sure-fire winner. If you have enough to buy a single-premium policy, consider investing the sum in a fixed deposit or mutual fund. These offer higher returns, which in turn can be used to pay regular premiums.
(The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal)
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
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