Single or regular premium insurance plan
You have made a prudent decision to avoid endowment plans and ULIPs to meet your life insurance requirement. You have decided to buy a term life insurance plan. However, it is still undecided about the premium mode of payment. Should you opt for a regular premium payment plan or a premium single premium life plan?
Let’s decide. Do not note the main focus of this post is just term life insurance plans. With other types of life insurance plans (endowment and ULIPs), the story can be terribly different.
Single or regular premium insurance plan
What is the difference between the single premium or the regular premium?
Under a regular premium payment plan, you pay premium each year for the term of the policy, ie if the policy coverage is 30 years, you pay premium for 30 years.
On the other hand, in a single prime term living plan, you pay premium only once and enjoy life covered for a few years. With single premium plans, there is no possibility that the life insurance plan expires due to non-payment of the premium.
In my opinion, if you are disciplined with your finances, this should not be too much concern. There is no real need to buy a single premium plan.
What is cheaper? Single premium or regular premium?
Under HDFC Click 2 protects more plan, Premium for a 30-year non-smoking man for the sum Insured of Rs 1 crore for a policy term of 30 years is Rs 10,378. In 30 years, you will pay Rs 3.22 lacs as premium (if you survive the term of the policy).
The premium for the Single Premium Variant under the same plan is Rs 1.67 lacs. The premium must be paid only once.
You may feel that the single premium variant is cheaper. However, it is necessary not to ignore the value of money time. A June 6, 1944 discount rate, the present value of all premiums paid is only Rs 1.57 lacs. I would not like much about this little difference. But yes, to buy a single premium plan, you need a large amount up front.
Your life coverage, along with your existing wealth should be enough to:
Calculate all your liabilities
Fulfill all your financial goals
Provide all your family’s regular expenses
As your wealth grows, your life insurance requirement could come down. It is quite possible that simply could not cover any life when a few years.
What do you do with your life insurance plan?
If you had purchased a regular premium life insurance plan, you will simply stop paying life insurance premium and the policy can automatically lapse. However, only in the case of single premium plan, you have already paid premium for every year. So, you can not even stop paying premium. Can you get something back if you surrender?
If HDFC Click 2 protects you more, if you quit the plan within the half term, you will get 70% of the proportional premium for the unexpired coverage period.
Therefore, if you give up when 10 years, you 70o * 1.67 lacs * (10/30) = Rs 38,966.
Again, there is not much difference. Note that this is for HDFC Click on Protect 2 more. Another plan may have a different surrender policy.
There is an additional scenario. Suppose you have already paid premium (single premium plan) for 30 years and also the disappearance happens when 5 years. The premium that you have simply paid for the remaining 25 years is waste in a way. In case of regular premium, you would have paid only 5 installments.
You get a tax benefit under Section 80C within the pay year only. So, even though you have paid premium for 30 years in one go, you will get tax benefits only in the pay year.
In the case of regular premium plans, you will get the tax benefit each year since you are paying premium per year. This side may affect you only if you rely on the term life insurance premium to meet your Section 80C limit.
An additional aspect to consider is that, for policies issued on April 1, 2012 or April 1, 2012, the Insured sum for your plan must be at least 10 times the annual premium. If that is not the case, then the tax benefit is limited to 100% of the sum insured.
For example, if the annual premium is Rs 1.2 lacs and the sum insured is Rs 10 lacs, the tax benefit is limited to Rs 1 lac (10% * Rs 10 lacs).
The biggest blow comes at the point of maturity because the maturity proceeds for the policies (where the annual premium> 100% of the Insured sum) is not exempt from tax under Section 10 (10D) of the tax law On income.