The insurance regulator IRDA was in the thick of news recently after it went after single premium insurance plans saying they needed to be taken off the shelf. While the industry stalwarts continue their flip flop on topic, we decided to check whether is makes sense to buy single premium term insurance plans in India.
But before we do, let us understand the basics and then see whether it makes sense to fit it in your overall financial planning.
How do single premium term insurance plans work ?
As the name indicates, single premium plans are policies that need you to pay the premium just once and never during the term of the policy. The other more common option is when investors have to pay regular premium each year during the term of the policy. In the single premium version, you need to pay just once and continue to enjoy the cover for the full term of the insurance policy.
Here is this explained diagrammatically.
Obviously, you might have guessed by now that in case of single premium policies, the premium that you pay upfront will be a larger amount.
Why are they good ?
Well, for one, the policyholder thinks that he will pay the premium just once in his life and it’s all done. The thought does have some merit because paying premiums regularly each year calls for discipline. If you miss it, then your policy might lapse.
You might argue that the ECS facility is there where in the premium can be automatically deducted but then you need to have the money in the bank account for that to go through. So paying the premium just once is easy.
Another reason is that during last minute tax saving season of January to March each year, these are peddled as tax savings instruments as the premium paid is allowed as Section 80C deductions. And gullible investors buy it as a tax saving instrument rather than for protection, which is what insurance is all about.
Why they don’t make sense
For one, the upfront premium is huge. But your insurance advisor would reason otherwise. He would give the following comparison. Data is for Kotak Preferred Term Plan.
If you would go for a regular premium plan, you will pay Rs 10,590 if you are 30 years old and are looking at a cover of Rs 75 lakhs for 25 years. That makes a total outgo of Rs 25 * 10,590 = Rs 264,750.
But if you take the single premium plan, you pay just Rs 147,444 now and pay nothing for all the next 25 years. Isn’t that a great saving sir, he would reason ? Chances are, most of the folks will fall for this.
Well, let’s do some calculations to check what the real story is.
If you were to park this single premium amount into a FD at say 8% rate of interest, you would fetch Rs 11,795 each year which can easily take care of the annual regular premium. An 8% rate of return is easily achievable from FDs these days – in fact most of the banks are offering a return of 9% – 9.5% on FDs.
Apart from the fact that the regular premium is taken care of by the interest return, your money will also grow over 25 years at 8% rate of return to Rs 235,574 ! So the question is, why lock in your money in a single premium plan when you can use that to pay the regular premium each year as well as make the capital grow.
Not just that, there is another disadvantage to single premium term plans. If you were to die during any of these 25 years, the sum assured is given out to your family but note that you have at this point of time already paid all the future premiums which no longer should have been paid. In a regular premium plan, since the premium payment frequency is each year, you do not have to pay future premiums in case of a claim.
What should you do ?
As you can see, you can save tons of money with the regular premium option. However, the single premium policies are selling like hot cakes.
If you are an earning person who is not sure about his future earning potential and income, then going for a single premium cover might make sense. If you are buying to save income tax or investing because you are sitting on a pile of money, get in touch with a qualified financial planner for better use of your money.
Note that while all this argument is made for term insurance, the same holds true for any single premium policy, be it ULIPs, endowment or others.
Thoughts, dear readers ?
Very good explanation, single premium plans never attracted me but i know many people would go for it for the simple reason that you pay once and forgot. People want to keep it simple. For me yearly premium works, for eg. if i pay yearly premium for two years and die on the third year i would save a lot of money and i would have earned 9-10% interest on the same via FD.
This is just another gimmick to fool investors.
Exactly, that is the point that most of the investors actually miss out on.
Excellent article. Two important take aways which I could get against single premiums are interest factor and inability to recover single premium if death occurs within the policy tenure.
Just one point which is the only reason why I have some inclination towards Single Premium policies – hassle free for the entire duration of the policy. Many of my clients, irrespective of the ease in paying annual premiums via interest payouts, don’t want the hassle. Many times people get windfalls / one time cash inflows which they are ready to park into Single Premium policies,rather than to bear with annual payouts. Can’t help with this issue !
Yeah I guess that is the case. But I believe the cash flows can be used in a better way than to park in single premium policies.
Also, I believe that investors have to move their b**t to do things the right way, then we need to push them to do it.
The easy way out is not always the right/beneficial way…
Thoughts ?
You are absolutely right. If people are escaping annual premiums just because they don’t have the discipline then they are missing the whole point of doing the financial planning.
Maintaining discipline while spending/investing money, isn’t that the whole point of financial planning?
Exactly, well said !
I don’t see too much hassels maintaining policies. With LIC you can add all your policies online and you get alerts when due date comes near and you can pay online. Moreover you can also opt for ECS facility.
That is indeed the case with all policies as you can maintain them easily but maintaining 10 of them is tough and if that figure is 2, then it is easy.
Good eye opener for the people who are fan of single premium insurance plans. I don’t know anyone who has the single premium policy.
One more good thing about paying premium each year is, you can cancel/change your term plan any time you feel you are getting better / cheaper option. For example, few years back there were no online term plans and today it’s a really good option. Ya you have to remember and pay every year, though I think that way you/your family member will remember that you have one policy and where the document is, what the number is ;), instead of invest and forget about policy and searching documents at the time of claim :). The only point I see is someone is not sure about future earnings and also a heavy spender, then they can go for single premium insurance.
Very important point you have raised here Chirag, “you can cancel/change your term plan any time you feel you are getting better / cheaper option.”
In this cut throat competition market, one would not want to get stuck with one company because once you are stuck, the company will not even consider you while changing their terms and conditions. Seldom companies pass on any benefit to the existing customers because they know customers are stuck and cannot go anywhere now.
I really like this article, it is an eye opener for people who are going for one time premiums without any proper reasoning. The companies use the opportunity of Jan-Mar period to sell such products and more often than not make successful business out of it.
The investment and flexibility to change the plan was always on my list but “in case of demise the premium already paid” point is another very important and crucial point.
In my view one time premium policies don’t make sense at all, they are mis-selling products and if IRDA is taking them out, it is a very good step.
For people who still feel like buying the single premium please give the money to me and i will make your payment on time each year and will give you this in writing in bond/contract.
Hey that’s a good business idea! Might work like wonders in this couch potato environment 😉
Count me in! 😀
Agreed that if the same single premium money is kept in FD its interest will pay up for the premiums , but this also means that the Prinicpal Amount of FD can never be removed /utilised .
Secondly agreed If a person dies he would have paid for the remaning premiums , but what about the insurance money his dependants would be gettings , it will be many a times multiple of that amount .This will easily offset it.
The best thing is pay once and forget about premiums , else every year your premiums will come to haunt , even when you may have other personal issues to take care off.
You will get the insurance money in either scenario. Pay premium once and forget is like paying for vegetables once to the grocer at the beginning of the year and then buying for the whole year. Does not make sense. Paying premiums automatically can be set up as well if they become a bother.
@Akshay,
Look at a different scenario. A person takes a 50 lakhs policy and pays one time premium of 1 lakh and dies the second year. In other scenario he pays premium of Rs. 5000 for the first year and dies in the second year. Now which is beneficial.
There are a lot of permutation and combination….
Single premiums have their pros and cons but when someone has extra money that he wants to invest and keep it locked a single premium helps. Moreover the FD calculation doesn’t always help e.g. a policy has a single premium of 2 lacs and the same policy if you pay annually has a premium of around 35 lacs, how will this work. If u have that extra money (a bonus, a gift, lottery etc) which you dont want to blow on unpredictable mutual funds or shares I think investing in a good policy whcih gives you good returns alongwith cover is the best option.
@Baba,
Can you be more specific on “unpredictable mutual funds”. There are quite a few debt funds out there that has generated returns in the range of 12-15%. I have personally invested in them.
Guys, you need to get this right now.
Insurance will give you a return of 6% – 8% – single premium or no single premium. ULIPS might be better than this.
Nothing can match SIPs of MFs if chosen wisely.
You have saved me from doing single premium policy for e-term plan
thanks
now i will go for yearly premium only
That so good to see… !!! Keep visiting us for more information. We will be relaunching this blog giving it a complete makeover soon. Do share your views how you feel… Rgds Madhupam
which company gives single term plan
What do you mean by single term plan ? You mean single premium term plan – almost all of them do.
Dear advisor,
You forgot about income tax. You have to pay income tax on interest. Now do calculation for 30% tax on interest and see.
If you happen to forget once for more than one month from due date then your new policy premium will be higher as in flat insurance payment you are paying high amount for term cover in early years
Logically cost of single premium should be lower as insurance companies can not pay more than 2% commission on them and policy servicing cost is lower to them too.
Besides they are supposed to factor early receipt of more money. It makes sense for them too to sell for single premium policy. It also indicates strong client who has capacity to pay upfront. It is risky person who would obviously like to pay every year compared to one time payment
Any way check your calculation in new pricing regime of 2014
Single Premium these days yield better than paying out if FD interest. This is based on the present interest rates. Companies have calculated annual premium by adding 9%pa. But the biggest drawback is the person dies during the term its a great loss. for those of them who do not have a regular income single premium is a great option. it still works out to 10% of the sum assured.
Now we have companies offering up to 80 years of age and thats a steal.
another option is the incremental payouts it is slated at 10 to 12% every year. but do read the terms and conditions on deferred payouts.
Cheers
Kumar
What do you mean by,
Apart from the fact that the regular premium is taken care of by the interest return, your money will also grow over 25 years at 8% rate of return to Rs 235,574 – . Once interest is paid annually the Principal amount will not grow. Can you please explain his
Dear Sudheendra,
The calculation is as follows:
First year FD Interest= 8% of Rs 147444 = Rs 11795
Now Rs 10590 goes towards annual premium payment and Rs 1205 (11795-10590) add up to principal wich now becomes Rs 148649 (147444+1205).
So next year interest you get is 8% of Rs 148649 = Rs 11892. Again 10590 goes to annual premium payment and left over interest Rs 1302 (11892-10590) adds to principal. That way it goes on for 25 years. Hope that clarifies…
Thanx for your query and keep visiting thewealthwisher.com (TW2). Soon you will find it revamped and in a new avatar. Thanks again.
Nice explanation, i was thinking about it, Now better I invest in FD and pay regular income.
Thanks for liking it Kamlesh!!! Single Premium Policies are costly and used by insurance companies to gather premium in one go. Also, prefer term insurance for your life insurance needs. It gives you high cover at the least cost.
I have a question , can you please explain the same considering the interest that cuts on the FD amount if the investor falls in 30% slab , can you please help by calculation of single premium is good or yearly. Considering 2 lakhs is what I can keep as FD now.
Dear Swathi, you are correct as FD rates have gone below 7% and with 30% slab, they offer equivalent return post-tax that of an LIC policy. My suggestion is don’t buy the single premium plan for insurance or investment either. For insurance Term insurance is the best avenue and once bought you need not alter it or add new policies. For investments, you may look at Company FDs (AAA or equivalent rated) or Debt Funds from Mutual Funds for returns over Bank FDs.
Dear Radhey Sharma,
This one of best and simple explaination i have ever seen to opt out for “single premimum option”
Expecting few more articles form your side
Thanks
santosh jadhav
Hi Santosh,
Now I am managing the wealthwisher.com and Thankyou for liking the article. As Radhey pointed out way back in 2013 that Single Premium policies are just a way how insurance company aim one-time AUMs through them and do not make any sense for investors. We had many such policies launched from 2013 till date especially during Dec-March period and each time they have robbed innocent investors. Yes, you can expect more articles on this topic. Thanks again for raising this important point.
There is one advantage of Single premium : It is applicable to Private Job owners as we have vulnerability of losing job due to recession, it may be a situation that we went out of job for few years and in that scenario due to non payment of regular premium my whole policy would become invalid.
if i opt for single premium when i was getting regular salary all my risk are covered, even though I have job or not later on …
Hi Roopak… Cannot deny your reason but it seems you are extra cautious or may be in a very volatile job industry. The investments cannot be planned in worst case scenario basis only. Also for certain regular premium paying policy premium holiday is one of the features for such mishappening. Otherwise, option to make policy paid up or surrender are also open.
Thanks for your response I did learn some new things . yes the scenario of the private world made me little bit more calculative. Personally I do insurance only to cover my risks and for investment i use other options including market . Well I believe in keeping two of them (insurance & investment ) as separate entity.