When should you opt for single premium plans?

NEW DELHI: Endowment plans and Ulips are promoted as products that meet the twin needs of insurance and investment, besides offering tax benefits. But what if an individual cannot meet recurring premium payment commitments? Enter, single premium plans.
Know the costs
Single premium policies are costly. For instance, a 30-year-old male buying a Rs 1-crore term cover with a tenure of 30 years will have to shell out Rs 1.62 lakh under a single premium plan.For the same policy, the annual premium works out to Rs 9,717. The total premium paid over 30 years under the regular policy would be Rs 2.91 lakh. “However, we need to discount this amount at a suitable rate to arrive at the present value because the premiums would be paid over many years, not all at once today. At 6 per cent discount rate, the present value works out to Rs 1.33 lakh,” explains Amar Pandit, Founder, Happyness Factory. Thus, a single premium policy is costlier by close to Rs 30,000.

Check compatibility
Single premium plans are suitable for those who are not confident of meeting recurring premium commitments. Those who lack the financial discipline and do not want their family to suffer can also consider this. Also, those who land a sizeable bonus or an unexpected lump sum and if their evaluation of life insurance cover throws up a shortfall, the funds can help buy a single premium plan and plug the gap.
Beware of the catch
Individuals keen on tax benefits must tread carefully as not all single premium plans are eligible for tax benefits. The reason being the mandate that the premium ought not to exceed 10 per cent of the capital sum assured in any of the years; if it breaches this limit, the maturity proceeds will be added to the taxable income in the year of maturity and be taxed as per the slab rate applicable. This is applicable to policies sold after 1 April 2012. For policies bought before this date, the limit is 20 per cent of the sum assured. In case of the policyholder’s death, this condition is waived and claim proceeds paid to nominees are tax-free.
“Policy buyers should evaluate if their plan’s maturity proceeds will be tax-free. Else, the purpose of choosing a Ulip over a mutual fund (due to LTCG tax) will be defeated,” says Suresh Sadagopan, Founder, Ladder 7 Financial Advisories. So, the key is to read the policy document carefully.