Single Premium Term Plan: Should You Opt for Them?

Single Premium Term Plan

Regular premium term plans offer the advantage of having multiple riders, such as a critical illness rider, which can be added to the policy for enhanced coverage and protection.

However, if you prefer a life insurance policy without the hassle of paying premiums repeatedly, you may consider a single premium term plan.

This plan allows you to make a one-time or limited premium payment for coverage spanning 20-30 years. While it may seem attractive, it may not be the most beneficial option for most individuals.

When purchasing a policy for the long term, paying the premium in advance may not align with your financial goals. Instead, if you have surplus funds, it is advisable to invest them in better investment options that can potentially yield higher returns.

On the other hand, if you do not have substantial funds available, opting for a regular term plan with periodic premium payments would be a more suitable choice.

Single premium term plans were initially introduced for individuals who experience a high income over a short period, such as cricketers, film stars, or those on short-term foreign assignments.

These individuals can afford to make a substantial premium payment upfront and continue enjoying the benefits of the policy for an extended period. However, insurance companies now offer this facility to almost all policyholders.

In a regular premium term plan, you pay the premium annually, quarterly, or semi-annually for a period of 20 to 30 years.

Alternatively, a limited premium plan requires premium payments for a shorter duration, typically ranging from five to ten years. Some insurance companies also provide the option to pay the total premium in one go.

After making the premium payment, you receive life cover for the specified period. For example, if you are 35 years old and opt for a plan with a 1 crore life cover for 25 years, you will continue to have life coverage until the age of 60.

Experts highlight that single premium plans generally require an upfront premium payment. In contrast, regular premium plans eliminate the need for further premium payments if the policyholder passes away.

The nominee receives the full amount of the life cover without any additional premiums. This flexibility is not available in limited premium plans.

It is essential to consider that the future is uncertain, and making a significant upfront premium payment may not be necessary or advisable when the policyholder cannot predict their future circumstances.

Additionally, single or limited premium plans may appear attractive due to the lower total premium amount compared to regular premium plans.

However, it is important to understand that this plan may not always be beneficial for the customer. If the policyholder passes away early, the insurance company benefits as they have already received the entire premium amount in advance.

This makes the plan advantageous for insurance companies as they quickly receive the premium and can increase their long-term investment income.

Instead of opting for a single premium plan, you have the option to invest the premium amount elsewhere and continue paying premiums at regular intervals by purchasing a regular premium plan.

This allows you to potentially earn better returns on your investment. You can allocate the amount saved from not making an upfront premium payment to investments that offer good returns.

Let’s consider an example: Suppose a 35-year-old woman purchases a life cover of Rs 1 crore with a 25-year term. If she pays an annual premium of Rs 12,876 for 25 years, her total premium payment will amount to Rs 3,21,900.

On the other hand, if she opts for a single premium plan, she would have to pay Rs 1,81,862 upfront. By choosing the regular premium plan, she saves Rs 1,68,986.

If she invests this amount at a 7% interest rate, it can grow to Rs 2,15,642 over 25 years. Similarly, at an 8% interest rate, the amount can increase to Rs 2,28,860. Please refer to the table below for a detailed comparison.

There is no denying that the premium amount in a single premium plan is Rs 1,81,862, whereas paying the premium every year would result in a total premium payment of Rs 3,21,900 over 25 years.

However, it is important to consider that the single premium plan does not account for the return on investment over time.

Moreover, the saved money from not making an upfront payment can be used to pay the premium every year.

However, if the policyholder passes away early, the premium outgo in a single premium plan is higher compared to a regular premium plan.

In addition to these considerations, regular premium plans offer the flexibility of including multiple riders, such as a critical illness rider, which may not be available in single premium plans.

Some insurance companies may also impose a limit on the number of years of coverage for single premium plans.

Furthermore, regular premium plans provide tax benefits as you can claim deductions under section 80C every year. Deductions in a single premium plan can only be claimed for a limited number of years.

In summary, while single premium term plans offer the convenience of avoiding repeated premium payments, they may not be the most beneficial option for most individuals.

Regular premium plans provide greater flexibility, the opportunity to earn better returns, the inclusion of multiple riders, and tax benefits.

It is important to carefully evaluate your financial circumstances, risk appetite, and long-term goals before selecting the most suitable term plan.