Swati, an insurance advisor, was narrating her experience of late in selling insurance policies. Whether it is the young lot, middle-aged ones or senior people, most clients are going for a single-premium policy. All these years, most of us have been accustomed to pay insurance premium on an annual basis. Why this shift to a single-premium policy? Let's try to analyse.
In single-premium policies, the holder pays premium just once and enjoys its benefits through the policy term. Such policies were present earlier but were, predominantly, endowment policies (Endowment insurance plans provide life insurance cover for a specific period. The insured can get the sum assured, plus any bonus or guaranteed additions that may accrue during the policy term.). Earlier, single-premium policies were more of an investment product, offering large returns on an assured basis. Often, there was little in terms of insurance coverage. But because that goes against the purpose of an insurance policy, which is primarily to offer coverage, an insurance product known as Unit Linked Insurance Plan (Ulip) has evolved over a period of time. Ulips make single-premium policies provide benefits to insurance policy holders in terms of returns and life cover.
BUNDLED PRODUCT
Let us understand how a Ulip typically functions. It is a bundled product that combines life insurance cover with investing. The investment in a Ulip works like a mutual fund and does not come with guaranteed returns. There are charges* levied by insurance companies on a single-premium Ulip. While the mortality charges and other costs (fund management charge, policy administration charge, etc) are deducted from the premium the policyholder pays, the remaining amount gets invested in the market. As per regulations, the life cover of a single-premium Ulip has to be at least 125 per cent of the premium. Some insurance companies provide life cover of as high as 20 to 25 times the premium amount, making these attractive to the policy holders.
If you survive the policy term, or redeem midway, you get the net asset value (i.e. market linked returns), multiplied by the number of units you hold. In the unfortunate event of death of the policy holder, the beneficiary receives either the sum assured or the value of the fund, whichever is higher.
Tax breaks are an important consideration while evaluating whether to go for a single-premium plan. Under Section 80C, you can claim an annual tax deduction of up to Rs 1 lakh towards investment in Ulips, provided your premium is 20 per cent or less than the sum assured. If you invest more than Rs 1 lakh, as chances are you might in a single-premium plan, you will forgo the tax deduction beyond Rs 1 lakh. By comparison, in a regular-premium plan, you will maximise your tax saving due to the piecemeal premium paid.
For example, Swati has sold a single-premium plan to Nikita with a premium of Rs 40,000 and life cover of Rs 1 lakh. Then, the deduction allowable under Section 80C is Rs 20,000 only. In this case, the single premium of Rs 40,000 works out to around 40 per cent of the sum assured, whereas the allowable tax exemption is a maximum of 20 per cent of the sum assured, which works out to Rs 20,000. Thus, the individual cannot claim a deduction on as much as Rs 20,000 of the single premium paid. If the individual is in the 30 per cent tax bracket, the tax outgo will be Rs. 6,000 (30 per cent of Rs 20,000).
Individuals looking at single-premium policies as a tax-saving investment should therefore opt for a sum assured which is at least five times the premium paid. The individual in our example should thus opt for a sum assured of Rs 2 lakh (five times of Rs 40,000) to be able to avail a deduction on the full premium amount. Here, it may be noted that factors like returns, affordability and tax breaks may, at times, give an edge to regular-premium plans.
Considering all this, even if you do decide in favour of a Ulip and the single-premium option, you need to have that lumpsum money at the outset. Single-premium plans are basically for people who wish to invest in one go and forget it for a long time (real long term investing!).
MATURITY PERIOD
Single-period products have varying maturity periods. Most products are of five, 10 or 15 years duration. It is advisable to go for a Ulip with tenure of more than 10 years to maximise returns. Though single-premium policies have a relatively short to medium term, they do allow policy holders the option of a premature withdrawal.
WHEN TO OPT
Who, then, should opt for single-premium policies? Here's when it can make sense:
* If you do not have a regular cash flow to sustain a premium payment each year.
* If you travel a lot, you could select this policy, as you wouldn't need to remember the due dates in mind.
* If you have a lumpsum amount available. You can also use this policy and complete your insurance requirement from the available funds.
* In case there is a favourable product in the market (e.g. Jeevan Aastha offered by LIC in January 2009 when the interest rates were peaking).
LIST FOR SINGLE-PREMIUM
* Life Cover offered
* Tenure of the plan
* Type of plan you wish to go for , i.e. equity oriented, debt or balanced
* Charges levied
* Tax breaks under Section 80C
* Liquidity of the plan
* Past performance of the product Do make your decision to go for a single-premium plan only after considering these. Remember, life insurance plans are not only for your own future but also of those for whom you care. So, take these decisions with proper evaluation and due care to get the best cover for your life.
* Readers may note that Irda has come with guidelines on the cost for a Ulip which will come into effect from October 1, 2009
