By Gargi Banerjee
When you have decided to buy a life insurance policy, the first thing you need to decide upon is the premium paying frequency. In other words you have to decide whether you want to pay the entire premium at one go (single premium) or would you like to pay at regular intervals such as monthly, quarterly, semi annually or annually. Now, let us see, which among these two kind of products scores higher.
The cost factor
The primary factor that one would consider while paying a premium on an insurance product is the cost. You would think that paying a single premium is cheaper than paying the premium continually, but that may not always be the case. Consider an example to understand this. Aayansh is 30 years old and he opts to pay an annual premium of Rs 10,000 for 15 years. This will give him a sum assured of Rs 2 lakhs. So effectively he pays Rs 1,50,000 for a period of fifteen years. His cousin Akshat, opts for a single premium option and thus pays Rs 1,10,000 on the same policy one time for the same sum assured.
You think Akshat makes a neat savings of Rs 40,000. But think again. You have not considered the inflation factor! So considering that the inflation is at 6%, the single premium of Rs 1,10,000 goes up to Rs 2,63,000 after inflation in 15 years. This means that Akshat has paid more in terms of what is called the “time value” of money. This is an important factor you must therefore consider and make the calculations upfront before you decide which is the right product for you.
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The affordability factor
Needless to say, single premium products carry larger ticket sizes when it comes to the premium amount. While they may seem cheaper upfront, it can be quite a strain on your pocket if you are a salaried individual in the middle income group. Unless you have money lying idle in a savings account or have suddenly come into some money that you want to lock away immediately do not consider the single premium products.
The convenience factor
If you are worried about the fact that you are by nature a forgetful person and may forget to pay your premiums on time, that will lead to a lapse in your policy, you are perhaps better off with a single premium product, if you can afford it.
The risk factor
Insurance plans are essentially long term products. This means you have to buy a policy of a tenure of 10 years or longer. If you are investing at one go in a single premium product, you are exposing yourself to considerable market volatility over the time period. A regular premium product on the other hand, protects you against market fluctuations as you get the benefits of “rupee cost averaging” or the process by which the cost of your investment is averaged in different investment cycles, thus protecting you effectively from market risks.
Related: 6 factors that affect how your life insurance premium is calculated
You can avail of tax benefits on both of these types of products. However, the tax benefit for both these types of products under Section 80 C is upto Rs 1.5 per annum. However, the difference is that under a single premium policy you can avail of the tax benefits only once, whereas in a regular premium policy, you can avail of the same tax benefit throughout the premium paying term.
The bottom line
As is visible from the points that we have illustrated above, regular premium policies offer long term benefits in terms of tax savings, risk exposure and affordability. If you are a salaried individual you are therefore better off with a regular premium product. You may still choose to park your money in a single premium product if you have a windfall gain, but do take into consideration the suitability of the product to your long term financial plan.
Source: Economic Times
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