Choosing between single and periodic premium

You have taken the first step in deciding to buy a life insurance cover. That usually means multiple decisions — which term plan to buy, should you mix insurance with savings, which traditional plan or ULIP to buy. But there is another critical decision that you may need to make — choosing premium paying frequency.

The question that needs to be answered is how to pay the premium — should the entire amount should be paid at the outset (in a single premium) or at regular intervals for a particular period of time (regular premium payments)? Both these options have their own set of pros and cons. Let's see how to choose.

Suitability

The single premium option is suitable for a person with irregular income or bulk money receipts like bonuses, and has no problem in putting away a lump sum amount for a long period of time.

Regular premiums, on the other hand, are suitable for people with regular income and those 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 sufficient insurance through-out. Although regular premiums need to be paid consistently if the policy has to continue, it gives you the option to discontinue the policy, if needed. This is the case especially in a term cover policy, where the amount of premiums paid is not too large. Consequently, the loss on discontinuance may not be much. The premium rates for term cover plans, in the present market, have been coming down.

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. Regular premium will not pinch your pocket much.

When setting the premium or charges of a plan, insurance companies usually price in a buffer towards future uncertainties. 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 in any costs 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 significant. But if the entire sum is invested at one go, as in single premium, it may expose you to market volatility. What if you invested when the Sensex was in a tearing bull run? But you can overcome this issue by opting for a ULIP product that comes 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.

On the other hand, a regular premium product allows you phase out your premium over many years, reducing volatility associated with the market.

Flexibility

In a single premium product, you can access your money only through a policy loan or by surrendering the policy. The applicable loan interest and surrender 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 premiums such as critical illness, accidental death, waiver of premium and so on.

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). But 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.

However, in ULIPs if there is not much difference between the minimum single premium and regular premium in a plan offering similar benefits, a 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 regular premium using the ECS facility.

So, is single premium the way to go? The choice for the premium payment frequency depends on your paying capacity and the kind of flexibility that you want from your insurance plan.

(The author is Regional Head, Bajaj Allianz Life Insurance

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