Sonia is planning to take an insurance policy for herself. Her friend suggests she goes for a single premium plan as she does not have to remember premium due dates.
Sonia can pay a premium of Rs 20,000 right now and wants to know the kind of cover that will be available for her and the tax benefits that come along. We take a look at single premium policies and tell Sonia if investing in one would be a good decision.
What is a single premium policy?
In single premium policies, the policyholder pays premium just once and enjoys its benefits throughout the policy term. Such policies were present earlier but they were, predominantly, endowment policies.
Earlier, single premium policies were more of an investment product, offering large returns on an assured basis. Often there was little in terms of insurance coverage. But because that goes against a purpose of an insurance policy, which is primarily to offer coverage, conditions have evolved for these policies over a period of time. These conditions make single premium policies beneficial only to some people and not all.
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What are these conditions?
There are few conditions that need to be fulfilled:
1. According to the new guidelines prescribed by the insurance regulator IRDA (Insurance Regulatory and Development Authority), the sum assured has to be a minimum of 5 times the single premium charged for a unit-linked insurance policy.
That is, if the single premium is Rs 25,000, the sum assured has to be a minimum of Rs 125,000. Further, the sum assured cannot be reduced except in the last two years of the policy.
Why this condition: This is aimed to provide a benefit to the customer. This is important because the higher the sum assured the bigger is the insurance cover for individuals, ultimately giving a higher benefit. While companies can offer a sum assured of more than 5 times, most companies prefer to restrict their offerings to the 5 times mark.
In Sonia's case, if she is taking a single premium insurance plan, the minimum cover she will avail is of Rs 100,000.
2. The tax benefit is available for the premium paid on an insurance policy under section 80C, only if the premium paid is not less than 20 per cent of the sum assured (or sum assured is 5 times the premium). Of course this restriction is applicable to all types of policies, single as well as regular premium. But because of their very nature, single premium policies face a restriction due to this clause.
If the premium is more than 20 per cent of the sum assured, the benefit of the tax deduction is restricted to the 20 per cent mark and the amount received on maturity is taxable. That is, if Sonia’s sum assured is say Rs 1 lakh, she will get the benefit of a deduction for the premium paid on the policy up to Rs 20,000.
Who should go for single premium policies?
1. If you do not have a regular cash flow to sustain a premium payment each year.
2. If you travel a lot, you could select this policy as you wouldn't need to remember the due dates in mind.
3. If you have a lump sum amount available. You can also use this policy and complete your insurance requirement from the available funds.