A Matter Of Choice

All these years, most of us have been habituated to paying insurance premiums on an annual basis. Nowadays, however there are many people who are opting for a single-premium policy wherein the holder pays a premium just once and enjoys its benefits lifelong. In times gone by, single-premium policies were mainly investment-led products, offering returns on an assured basis. However, insurance cover in such policies was abysmally low. To counter this shortcoming, Unit Linked Insurance Plans (ULIP) was developed. Such single-premium policies pro-vide adequate benefits to insurance policy holders in terms of returns as well as cover.[INSERT_1]

A ULIP combines life insurance cover with an investment instrument. The investment instrument in a ULIP works like a mutual fund and does not come with guaranteed returns. Moreover, there are various charges levied by insurance companies on a single-premium ULIP such as mortality charges, fund management charge, policy administration charge, etc which are deducted from the premium the policy holder pays. The remaining amount gets invested in the markets. As per regulations, the life cover of a single-premium ULIP has to be at least 125 per cent of the premium. Some insurance companies like Tata AIG and Metlife provide life cover of as high as 30-40 times the premium amount, making these extremely attractive to the policy holders.
If you survives the policy term, or stops the policy in between, you get the net asset value, multiplied by the number of units you hold. In the unfortunate event of death of the policy holder, the nominee receives either the sum assured or the value of the fund, whichever is higher. Tax benefits are one of the important areas to consider while deciding between a single-premium and a regular plan. Under Section 80C, you can claim an annual tax deduction of up to Rs 1 lakh towards investment in ULIPs, provided your premium is 20 per cent or less than the sum assured. So, if you invest more than Rs 1 lakh, in a single-premium plan, you will forgo the tax deduction beyond Rs 1 lakh. By comparison, in a regular-premium plan, you will maximise your tax saving due to the yearly premium paid.
Let’s assume that one buys a policy with a premium of Rs 30,000 with a life cover of Rs 1 lakh. In this case, the single premium of Rs 30,000 works out to around 30 per cent of the sum assured, whereas the allowable tax exemption is a maximum of 20 per cent of the sum assured, which works out to Rs 20,000 (under Section 80C). Thus, the individual cannot claim a deduction on as much as Rs 10,000 of the single premium paid and hence if the individual is in the 30 per cent tax bracket, the tax outgo will be Rs 3,000 (30 per cent of Rs 10,000). Given this condition, individuals looking at single-premium policies as a tax-saving investment should therefore [PAGE BREAK]

opt for a sum assured which is at least five times the premium paid. Thus, in our example the individual should thus opt for a sum assured of Rs 1.5 lakh (five times of Rs 30,000) to be able to avail a deduction on the full premium amount.
When it comes to choosing between single and regular premium paying plans, factors such as returns, affordability and tax breaks put regular premium plans at an advantage. However, there are certain situations under which it makes sense to go in for a single premium policy. Some of these situations are:
•    If you do not have a regular cash flow to sustain a premium payment each year, these plans might be worth considering
•    If you travel a lot, you could select this policy as you don’t need to remember the premium due dates
•    If you get a lump sum amount you can also use this policy and complete your insurance requirement from the available funds
•    In case there is a favourable product in the market it might make sense to go in for such a policy and complete your insurance planning.
Single premium products have varying maturity periods. Most products are of 5, 10 or 15 years duration. To get the full benefit of the fund you are investing in it is advisable to go for a ULIP with tenure of more than 10 years to maximise returns. Also, remember, life insurance plans are not simply a financial instrument but also a safeguard for your near and ear ones to protect them against unforeseen occurrences. So, take these decisions with proper thought to get the best cover for your loved ones. A checklist while opting for a single premium plan should include: a) life cover b) tenure c) equity oriented, debt or balanced d) charges e) tax breaks f) liquidity g) past performance.