Come tax season and you may be inundated with calls from life Insurance companies who are trying to push life insurance policies to you. Unfortunately in India, life insurance policies are not bought on the basis of needs but are still largely looked at as a means of saving tax. Anecdotal evidence thus suggests that during the fag end of a financial year, when people are trying to get the maximum possible tax exemption, they tend to choose insurance policies in a hurry without assessing whether or not it will be really beneficial to them. One among such policies that insurers push therefore is a Single Premium policy. Now let’s take a closer look as to whether or not such a policy is worth making an investment in.
As the name suggests, a Single Premium Policy is one in which you make an investment for one time alone as compared traditional or regular insurance policies in which you need to pay premiums at regular intervals. In a way it is indeed a hassle free kind of policy where you do not need to bother about any more payments once your premium is over and done with, but does it indeed make sense and give you the kind of benefits you may be looking for in a policy?
To begin with, let’s examine the tax benefit, or the bait the most insurers use during the tax season. While tax benefits exist in both kind of policies, it is important for you to bear in mind that by investing in a Single Premium Insurance policy you will only be eligible for a one-time tax benefit, as against a regular life insurance policy you are entitled to receive tax benefits until maturity. This means with a regular policy you can get tax exemptions each year and when bunched up with your other investments you can get an exemption of Rs 1.5 lakhs (as per current tax legislation) every year.
Life insurance policies are by no means cheap and the cost of the same must be factored into your budget. If you buy a single premium policy as against a regular policy, you will save a chunk of money upfront on the face of it. For instance, if you plan a policy cover of ₹ 1 crore for 35 years your annual premium works out to be ₹ 8350. However a single premium payment on the same policy would work out to be approximately ₹ 2,30,000 crore. As you can see you will therefore save at least ₹ 60,000 upfront. However, the important thing to note in this case is that this example does not take into consideration the inflationary factor. Therefore, even if you choose to make periodic payments, your pay-outs would factor in inflation and may turn out to be discounted.
So, does this mean that single premium policies should be avoided at all cost? Not necessarily. The benefits of single premium policies apart from the upfront cost savings factor is that they have slightly better return generating capabilities than regular endowment plans. While a regular policy would generate returns of 5-7%, a single premium policy has the capability to generate returns of 8-9%. Single premium insurance policies could therefore make sense for those who are in freelance professions such as doctors or lawyers who are currently in their most productive years and want to protect the future of their family with adequate life insurance cover. Even if you do have a regular income, but have money sitting idle in a bank account and you feel that your life insurance cover is not really adequate, you can consult your financial planner and plan to invest it in a single premium life insurance policy.
So in conclusion, it would be fair to say that a single premium insurance product should be considered if you are looking for a pure protection product to boost your insurance cover and have a lump sum in hand. Do bear in mind that insurance is a need based product meant to provide protection primarily, and should be bought after careful consideration. Else, if tax savings or higher returns are on your mind, it would be better to check out other investment avenues that fulfill these objectives.
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