You have taken the first step in deciding to buy a life insurance cover. While you think of which term plan to buy, whether you should mix insurance with savings with/without investment return, the choice between traditional plan or ULIP, there is another critical decision you need to take: choosing the premium payment frequency.
The question that needs to be answered is how to pay the premium - whether the entire amount should be paid at the outset (in a single premium) or should you pay at regular intervals for a particular period of time (by regular premium payments)? Both these options bring their own set of pros and cons. Let us take a look at them.
Suitability
The single premium option is suitable for a person with irregular incomes or bulk money receipts like bonuses, and has no problem in putting away a lump sum amount for a long period of time. They, however, will be able to pay the premium only when they have sufficient funds in hand.
Regular premiums, on the other hand, are suitable for people with a regular income and who cannot afford to block a big sum at one go. Rather, such individuals would have the capacity to pay premiums regularly for years to come, which can be yearly, half-yearly, quarterly or monthly frequency. Then again, it can be for the full term of the policy or a limited period during the policy term.
Single premium plans being a one-time payment take away the fear of forgetting to pay future renewal premiums and the resultant lapse of policy. Thus, these are suitable for those seeking peace of mind of having the suitable insurance throughout, without the hassles of paying any more premiums. So, pay just once, but the insurance policy continues providing the required life cover and savings.
On the other hand, although regular premiums need to be paid consistently if the policy has to continue, it can offer you the option to discontinue the policy, if needed. This is the case, especially, in a term cover policy, where the amount of premium paid may not be too large. Consequently, the loss on discontinuance may not much. The premium rates for term cover plans, in the present market, have been coming down.
Affordability
Single premium plans in the market, usually, carry larger minimum premium sizes than a regular premium for the same plan. So, the single premium payable can be substantially large amounts for a reasonable cover. But in a regular premium case, the amount of each premium will be small and this will not pinch your pocket much.
Also, when pricing of the premium/charges of a plan, insurance companies, usually, cost-in for any uncertainties of the future in the calculation. The main difference between a single premium and a regular premium plan can be in lapse, expenses and investment return. Since single premium will not have to factor for discontinuation of premium, renewal commissions and expenses with respect to renewal activity, the overall premium payable can be lower.
Risk Exposure
Insurance plans are basically long-term products. If the investor stays invested for at least 10 years, the returns can be larger. However, since the entire sum is invested at one go, it may expose you to market volatility. But you can overcome this issue by opting for a ULIP product that comes, mostly, with free switches. A switch can help you move your money across asset classes. Usually, you are entitled to a certain number of free switches and any number of paid switches.
For instance, if you choose a wealth plan that offers a systematic switching option, your entire money, first, goes into a liquid fund and, then, every month, a part of it goes into the funds of your choice. Thus, it protects you from market fluctuations.
On the other hand, a regular premium product will cover the risk of the volatility of the market. Take for instance you are investing at a point when the markets are about to peak. (How one can decide this is a completely different question.) It is very difficult to ascertain the state of the market tomorrow. In such circumstances, a more frequent payment of premium can save you against such market fluctuations.
Flexibility
In a single premium product, you can access your money only through a policy loan or by surrendering the policy. However, the applicable loan interest and surrender fee/charges can be onerous, but the quantum of loan in a single premium can be bigger. Most companies do not offer riders on single premium options, whereas a range of riders are available on regular premium such as critical illness, accidental death, waiver of premium etc.
Tax Benefit
Single premium plans are eligible for deduction under Section 80C and section 10(10D) that makes withdrawals tax-free (subject to life cover being five times the premium). However the deduction under Section 80C can be availed only once. On the other hand, in a regular premium plan the IT benefit can be availed throughout the premium paying term.
In a nutshell
The total regular premium over the policy term can be higher than single premium for the same benefit. In ULIPs, however, if there is not much difference between the minimum single premium and regular premium in a plan offering similar benefits, the lower sum assured multiple can be taken with a single premium plan. Instead of blocking a large amount, a fixed lump-sum can also be paid as a regular premium.
The choice for the premium payment frequency depends on paying capacity and the flexibility that you want from the insurance plan.
Source - Financial Express
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