You have decided to purchase an online term life insurance plan. When you went to website of the life insurance company, you found that you have multiple premium payment options. You could go for a single premium option or limited premium payment or regular premium payment option.
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PREMIUM PAYMENT PLANS
Single Premium
Pay once at the start of policy term. Choose this option if your cash flow is erratic or you are likely to miss premium payments in future
Regular Premium
Premium and policy terms are same. Preferred option
Limited Premium
Premium payment term is less than policy term. Less common option for term insurance plans
[/pullquote]What Is the Difference?
Under a single premium plan, you need to pay premium just once. For instance, you pay premium once and get life coverage for 10 years. Under regular premium payment plan, premium payment term and the policy term is same. i.e., you pay premium for 15 years and get coverage for 15 years. Under a limited premium payment plan, premium payment term is less than the policy term. For example, you pay premium for 10 years while the life cover is for 15 years. Limited premium payment plans are not very common for term insurance plans but are quite common in traditional life insurance plans and ULIPs. If you feel you may not remember to pay premium next year, then you can go for a single premium option.
Which Is Cheaper?
When it comes to term insurance, there is not much difference. I will take HDFC Click 2 Protect Plus plan for comparison.
- For a 30 year non-smoker male in Mumbai, a life cover of Rs 1 crore for 30 years will cost Rs 1.67 lacs under single premium payment option. This is along expected lines because you are paying premium for 30 years at one go.
- Under regular premium plan, it will cost Rs 10,378 per annum for 30 years.
- Under limited premium for 25 years (policy cover for 30 years), the cost is Rs 11,318 per annum for 25 years.
Not much difference between regular premium and limited premium plan. Under regular premium plan, you pay Rs 10, 378 X 30 years = Rs 3.11 lacs. This seems quite high as compared to single premium plan (Rs 1.67 lacs). However, you must note that the premium of single premium plan has to be paid today whereas the premium for regular premium plan has to be paid over 30 years. If you discount the annual premium at 8% p.a., the present value is Rs 1.30 lacs. At 6% discount rate, the present value is Rs 1.57 lacs. Again, not much of a difference.
Which One Is Better?
You must see that in case of single premium plan, there is significant cash outgo upfront. The other aspect is your cash flow. If you feel your cash flows are erratic and you have cash with you at the moment, then it may prudent to purchase a single premium plan. However, the premium is typically quite low for term plans and should not be a problem unless in case of extreme cash crunch.
Tax Treatment of Life Insurance
You get tax benefit under Section 80C for life insurance premium paid only in the year of payment. It does not matter if the premium is paid for multiple years. Hence, single premium plan is at a disadvantage as compared to regular premium payment plans. Personally, I wouldn’t pay much weight to it.
There is an additional aspect that may come into picture for insurance-cum-investment plans. Premium paid towards a life insurance is eligible for tax benefit under Section 80C of the Income Tax Act.
How much of the premium paid is eligible for tax benefit?
Contrary to the popular perception, the entire life insurance premium paid may not be eligible for tax benefit. The tax benefit is Lower of Annual Premium or 10% of the Sum Assured. And this is within overall cap of Rs 1.5 lacs for tax benefit under Section 80C. Hence, if the annual premium is Rs 1 lac for Sum Assured of Rs 8 lacs, you will get tax benefit for only Rs 80,000 towards the premium paid. You may be comfortable with the above restriction.
However, the greater issue is with the taxation of maturity proceeds. As per Section 10 (10D) of the Income Tax Act, for life insurance policies purchased on or after April 1, 2012, if the annual premium is greater than 10% of Sum Assured, then the life insurance maturity proceeds are NOT exempt from tax. The maturity amount in such cases is added to your income and taxed at your income tax rate. This may come as surprise to many.
This condition may not change anything for term insurance plans because, in case of term plans, the Sum Assured is a much higher multiple of Annual Premium. However, in case of insurance-cum-investment plans such as traditional life insurance plans or ULIPs, this can be a problem. For single premium ULIPs or traditional plans, this will quite likely be a problem.
I am quite sure your agent or the insurance company will not inform you about this aspect of taxation while selling you a single premium plan. Hence, from the perspective of taxation, single premium traditional plans or ULIPs must be strictly avoided. There is no issue with single premium term plans. If you feel that you can hide this from Income Tax department, you are wrong. Insurance company will deduct TDS at 1% for such cases (where you have tax liability). Hence, the TDS trail will easily lead IT department to your door steps. Do note any payout from life insurance company in the event of death of the policy holder is exempt from tax. This is irrespective of level of the Sum Assured as compared to Annual Premium.
What Should You Do?
I have never been a big fan of traditional life insurance plans or ULIPs. I will recommend that you keep your insurance and investment needs separate and stay away from ULIPs and traditional plans. However, in case you find some merit in such plans, be aware of the taxation aspects. A single premium endowment plan or ULIP must be avoided. Your agent or the insurance company will never tell you.
Coming to term life insurance plans, in my opinion, it does not make much difference. Based on your comfort and cash flow position, you can go for a single premium, limited premium or a regular premium plan. Personally, I prefer regular premium term plan. However, if you fear you may skip premium due to change in location, nature of work or lifestyle, you can go for a single premium plan too. When it comes to life insurance, go for options that are easy to implement and convenient for your family to understand.
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