Life Insurance

What is Single Premium Policy and How It Works?

Premium is the cost that you pay for availing of coverage under the plan. As the insurer undertakes your risk of death, you pay a consideration for the contract in the form of premium. When it comes…

Premium is the cost that you pay for availing of coverage under the plan. As the insurer undertakes your risk of death, you pay a consideration for the contract in the form of premium. When it comes to premium payment, life insurance policies allow multiple premium payment options. Life insurance plans allow the facility if regular premiums, limited premiums, and single premium.

Let us understand what single premium-

What is Single Premium Policy?

single premium policy is one wherein you are required to pay the premium only once. This premium is paid when you buy the policy. Though the policy tenure can be long, the premium payment liability ends after the single premium is paid.

How does It work?

Under this policy, the lump sum amount of premium is determined based on the type of policy you are buying, your age, sum insured, policy tenure and other factors. Thereafter, you have to pay the premium in lump sum when you apply for the coverage. The company, then, underwrites your risk and issues the plan. The plan would, then, run for the term that you choose. It would pay the death benefit; survival benefit or maturity benefit as per its benefit structure.

For example, say you buy a 20-year term insurance policy for a sum assured of Rs.50 lakhs. You choose the single premium payment option. The insurance company charges Rs.12 lakhs as the single premium and issues the policy. Thereafter, for the duration of the plan, i.e. 20 years, you would not have to pay any premium. You can enjoy the full cover of Rs.50 lakhs which would be paid in case of death during the tenure.

Features of Single Premium Insurance:

Here are some salient features of this policy –

  • The single premium life insurance rates are higher compared to regular or limited premium rates. This is because the premium is collected at once and so, you have to pay the entire cost of the policy at one go which is a considerable amount
  • Though tax on single premium life insurance plans is computed like regular or limited premium plans, you should be careful. Since the premium is high, you might lose out on the tax benefits if the premium exceeds the sum insured by 10% (20% for policies issued on or before 31st March 2012)
  • best single premium policy does not lapse since future premiums are not required
  • The surrender value under traditional plans is usually available from the second policy year itself. In case of ULIPs, however, there is a lock-in period of 5 years after which you can withdraw the surrender value

What are the benefits of Single Premium Insurance?

Many policyholders opt for single premium payments because of the benefit such policies provide. Some common benefits include the following:

  • You are freed from the recurring liability of premium payment
  • Since the policy does not lapse, you can enjoy full coverage with just one-time payment
  • It is suitable for individuals looking to invest a lump sum amount of money at once
  • If you buy a participating one time premium policy, you can earn bonuses even without paying regular premiums

Tax on Single Premium Life Insurance plans:

Here is the tax implication on single premium policies –

  • Tax on premium: Premiums paid up to Rs.1.5 lakhs can be claimed as a deduction under Section 80C of the Income Tax Act, 1961. However, the deduction is allowed for up to 10% of the sum assured (20% if the policy was issued on or before 31st March 2012). If the premium exceeds 10% or 20% of the sum assured, the tax benefit would be limited to 10% or 20% of the sum assured.  Any excess premium would be taxed at your income tax slab rates.

For example, if the sum assured is Rs.10 lakhs, the single premium should be up to Rs.1 lakh to claim full deduction. If the premium is Rs.1.5 lakhs, deduction would be allowed on Rs.1 lakh while the remaining Rs.50, 000 would be subject to taxation.

  • Tax on benefits: Death benefit is always a tax-free benefit. In case of maturity, if the premium was up to 10% or 20% of the sum assured, the maturity benefit would be allowed as a tax-free benefit under Section 10(10D). If, however, the premium exceeded 10% or 20% of the sum assured, the entire maturity benefit would be taxable in your hands.

In case of ULIPs, if the aggregate premium exceeds Rs.2.5 lakhs in a year, the returns earned would be subject to long term capital gains tax.

Understand what single premium plans are and how they work. Also have a look at their tax implications and then buy a policy with complete knowledge.

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