Life insurance plans are intended to secure the future of family members. There are various kinds of insurance plans to cater the needs of different kinds of people. You can buy an insurance policy with a single premium or multiple premiums paid at regular intervals. If you have sufficient funds, you can choose a single payment option. Employees would like to go for monthly plans so that there will not be any financial burden on them. The premium should be paid before the deadline to enjoy the benefits of the insurance plan.
Advantage of single premium plans
With a single premium policy, you will enjoy many benefits. The policy is affordable as the premium cost will be lower than the regular premium. If you have access to sufficient funds, you can go for single premium plans.
When you go for a regular premium, there will not be any financial issues. An employee can contribute to monthly premium very easily. As the premium can be deducted by the employer from the salary, it will be credited to the insurance company automatically.
Hence, there will not be an additional burden in saving the money towards the premium. By contributing to small amounts on monthly basis, the employee will be able to take care of other financial needs as well.
Return on the investment
While calculating the returns from the life insurance plan, you should calculate the contribution in terms of premium. If you pay a monthly premium, the administrative cost of the insurance plan will increase. Hence, the overall contribution to the plan will increase.
By subscribing an insurance plan with a single premium, you can take advantage of the time value as well. The monthly contribution to an endowment plan over a period of 30 years will be two times higher than the single premium contribution.
If you can afford a single premium plan, you can go for it so that you can earn a little higher return on the investment.
Convenience
Your policy will not lapse after paying the single premium. If you go for the regular plan, the policy will lapse when the premium is not paid before the grace period. Due to the lapse of the policy, you might want to revive it by paying penalty. The other choice is the purchase of a new insurance plan at a higher premium.
The inconvenience with the single premium policy is that you will not be able to surrender the policy or discontinue the policy. You should incur higher surrender charges if the insurance company permits pre-mature withdrawal of the policy.
Risk
If you buy Unit Linked Insurance Plan (ULIP) with the single premium, the risk exposure will be very high. If the market performance is downhill, there will be a great loss. You should choose the ULIP that offers better fund switching and control features.
By investing in ULIPs through the regular premiums, you can decrease the risk and maximize the returns. You should purchase an insurance plan as per your risk portfolio.
Tax implications
There are good benefits associated with the regular premium as you can distribute the premium through many years towards the income tax exemption. The single premium is applicable in the respective financial year of contribution for claiming tax exemption under Section 80C of the income tax act.
If you have other saving instruments under Section 80C such as PPF, home loan and ELSS, you can opt for a single premium.
Selection of insurance plan and mode
The selection of insurance plan as well as mode should be in tune with your financial needs and premium paying capability.
The term insurance offers better coverage than the money back or endowment policy. The premium will be low. The drawback is that you will not get back the money if the policyholder is alive throughout the term. If the risk takes place, there will be very high yield to the nominee. The single premium will deliver excellent financial compensation.
The single premium invested in ULIPs will pose a great risk to the policyholder. As the returns are linked to the market performance, the premium (initial capital) may suffer loss. Hence, you might consider other save avenues such as equities, PPF, and bank deposits besides have a secured term policy.
The tax saving potential of endowment or money back policies will be attractive. Individuals who do not have other savings which fall under section 80C may prefer regular premium plans. It is possible to contribute to the plan as well as get better yield at the maturity date.
Conclusion
You should be aware of the advantages and disadvantages of single premium as well as multiple premium policies. You should get better financial results plus convenience with either of the insurance plan. By consulting your financial advisor you can take the best decision without any confusion.