Millions of people die a sudden, unpredictable death every year due to accidents, diseases or calamities. The death of a bread-earning member can have a huge financial impact on the family, along with emotional devastation. No one can predict the future, but one can at least try to limit the financial impact. Term insurance is one of the most basic financial products in the market. Term insurance plans provide substantial coverage at affordable rates. However, choosing between different types of term insurance can be difficult, especially between single premium and regular premium plans.

What is a single premium term insurance?

A single premium policy is a one-time payment insurance policy whereby the policyholder has to make a single lump-sum payment to enjoy life cover for the entire tenure. It eliminates the need to make periodic payments and keep regular track of the plan. It is like a ‘fire and forget’ missile. You just have to buy a single-premium term plan and be care free.

When to buy a one-time premium insurance plan?

A one-time premium insurance plan requires an upfront lump-sum payment. It is preferable when you have a considerable amount of money lying idle. It could be a windfall gain or inheritance or a gift.. Salaried-class people will, however, find it easier to service a regular term insurance plan. In a nutshell, if you have surplus cash or are not confident of meeting recurring premium commitments, single-premium policies can be your first choice.

Benefits of single-premium term plan

Depending on the income pattern of an individual, single-premium policies have several benefits. With one-time payment term plans, you do not have to worry about the policy getting lapsed due to non-payment of premiums. Once you purchase a policy, it is valid till the end of the tenure.. In case you have to take a loan, some insurers allow the term plan to be used as collateral. Investing in term insurance with a one-time premium also provides some tax benefits. The premium paid is eligible for tax deduction under Section 80C of the Income Tax Act, while the policy payout is exempt under Section 10(10D) of the Act subject to conditions prescribed therein.

Drawbacks of single-premium term plan:

Term plans have become synonymous with affordability and tax savings. But in the case of one-time payment term plans, the primary reasons to buy a term plan take the backseat. With the entire premium being paid in one instance, not all single-premium policies qualify for tax exemption. As per Section 10 (10D), if the premium payable in a year exceeds 10%/20% of the sum assured then the policy proceeds will be taxable. The 20% criteria are for policies issued between April 1, 2003, and March 31, 2012. For policies issued after March 31, 2012, the limit is 10%. Further, for polices issued on or after April 1,2023, if the amount of premium paid/ payable by a person in respect of life insurance policies (other than ULIP policies) for any of the previous year during the term of the policy exceeds INR 5,00,000, then such person would not be eligible to claim exemption under section 10(10D) of the Act. However, as per the guidelines issued by CBDT, such limit of INR 5,00,000 is not applicable in case of pure term insurance policy i.e when amount is paid only in case of death of insured.

The cost of single-premium policies also turns out to be higher over the long run. In absolute terms, the total amount paid as premiums for regular term plans is much higher than one-time payment policies. But when the amount is discounted to arrive at the present value, regular premium policies are comparatively cheaper than single-premium policies.

Conclusion:

Term plans with single premium payment have their advantages and disadvantages. The final decision to purchase a single-premium policy should be guided by the cash flow situation and the compatibility of the buyer. If the potential buyer is a salaried employee, it doesnÂ’t make sense to invest a lump-sum amount in a term plan. The term plan can be serviced through regular payments.

The detailed terms and conditions of the term plan are also very important. As an investor you also need to check the tax efficiency of the plan and see if itÂ’s compatible with your goals as the maturity proceeds basis conditions prescribed in the Act may get added to your income and be subject to income tax and TDS applicable therein. To get more clarity you can talk to our trusted and experienced advisors.