Single or limited premium payment term alternatives appear appealing because the total premium outgo is lower than that of a standard term insurance plan.
Single Premium Term Insurance
Plans with limited premium term options were originally created for those with high income for short durations - like film stars, cricketers, or people going abroad on deputation. This helped them pay the premiums quickly and receive the policy benefit for an extended period. Now that times have changed, insurance firms offer this choice in practically all of their policies.
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Regular premium term insurance plan require you to pay premiums on an annual, monthly, quarterly, or semi-annual basis over the course of the policy term, which commonly varies from 20 to 30 years. Limited-term insurance plans offer shorter premium payment periods of five or ten years or even a single premium payment.
And that is the appeal of single or limited premium term-life insurance plans: you can pay the premiums in one lump sum or over a few years in exchange for 20-30 years of life insurance coverage. Despite its apparent appeal, single or limited premium term plans are not always the best choice for the majority of consumers. In this article, we will learn why it may not be the best choice as it is portrayed to be
First, paying the entire amount upfront makes little sense when you get the same life insurance coverage for the entire policy period, regardless of the payment plan.
Two, a single premium plan essentially requires you to pay the insurer in full for life insurance coverage. Single or limited premium payment term alternatives appear appealing because the total premium outgo is lower than that of a standard term insurance plan. However, this may not always benefit the customer. If the policyholder dies during the policy term under a regular term insurance plan, future premium payments will be ended, and the sum assured will be paid to the family. This is not possible if the customer has chosen a limited premium plan because, in the event of an early death, the insurance company is the clear beneficiary, as they would have received all premiums in advance.
Considering the unpredictability of life, no one knows the future. Here is where the experts seem to question why pay a higher amount ahead for the same sum assured when the policyholder's mortality is uncertain. Instead of paying a big upfront amount, consider investing your spare funds.
Assume a 35-year-old woman purchases a Rs 1 crore life insurance policy for 25 years and lives to the end of the term. If she chooses a yearly premium of Rs 12,876 for 25 years over a one-time premium payment of Rs 1,81,862, she will have Rs 1,68,986 to invest. Even with a 7% annual rate of return on the balance amount (after paying the annual premium), she will end up with a corpus of Rs 1,15,642. If she invests at 8% every year, she will have Rs 2,28,860 after 25 years.
One could argue that the difference in premiums paid must also be considered, with a single payment of Rs 1,81862 versus a total premium of Rs 3,21,900 paid over 25 years. There are a few issues to consider here. First, this sum of premiums does not take into consideration the time worth of money. Two, investing the money that you will save on upfront premiums can help you recoup the additional amount paid as an annual premium. Most notably, if the policyholder dies earlier during the policy period, the single premium choice will result in a higher premium payment than the normal premium option. You can use a term insurance calculator to find the applicable premium for any desired life cover.
Aside from the financial logic, a regular premium plan has several other advantages. One can choose a critical sickness rider which is not available with a single premium plan.There is also a tax aspect to consider. Premiums paid on a life insurance policy can be claimed as a deduction (up to Rs 1.5 lakh) under Section 80C of the Income Tax Act. With a limited premium plan, you can only claim this deduction for a few years. Not all single-premium policies are eligible for tax exemption because the entire premium is paid at once. Section 10 (10D) states that if the premium payable in a given year exceeds 10%/20% of the sum assured, the insurance proceeds will be taxed. The 20% criteria apply to insurance issued between April 1, 2003, and March 31, 2012. For plans issued after March 31, 2012, the cap is 10%. Furthermore, for policies issued on or after April 1, 2023, if the amount of premium paid/payable by a person in respect of life insurance policies (other than ULIP policies) for any previous year during the term of the policy exceeds INR 5,00,000, such person will be ineligible to claim an exemption under Section 10(10D) of the Act. However, according to CBDT guidelines, such a restriction of INR 5,00,000 does not apply to pure-term insurance policies, which pay out solely in the event of the insured's death.
At last,
If you understand what is term insurance, you will know regardless of how quickly the premium is paid off, the amount of life insurance chosen will cover you for the whole policy period. If you are 35 years old and choose a Rs 1 crore life insurance policy with a 25-year term, you will be covered until the age of 60 under all three options. However, the premium paid will vary, depending on what you choose. In other words, those with a consistent income source will benefit more from regular premium term plans. Even if you have cash flow concerns, a regular premium term plan may be a more cost-effective alternative to getting a life insurance policy. It offers an affordable way to obtain life insurance. However, those with unstable financial flows or limited employment opportunities may consider limited premium plans. In this manner, they can put their significant income flows to good use by obtaining life insurance to ensure their family's long-term financial security.
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