Why single premium plans are not recommendable
Why single premium plans are not recommendable
Single premium policies are not good tax saving instruments. All single premium plans cost more to the customers and fetch lesser returns as compared to the regular premium plans.
Less Tax Savings:
As per IRDA, from 1st April 2012, life insurance premium paid in an year upto an extent of 10% of the sum assured shall only be eligible for deduction u/s 80 C.
LIC website mentions this very clearly as below:
"Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof , under an insurance policy , ( other than a contract for a deferred annuity,) issued on or after the 1st day of April 2012 shall be eligible for deduction only to the extent of 10% of the actual capital sum assured."
Source - http://www.licindia.in/tax_benefit.htm
Therefore, the life insurance premium in an year should not be more than 10% of the sum assured. Since all single premium plans charge all premium at once, the premium is always more than 10% of the sum assured.
The same amount of premium is spread over several years in regular premium policies and hence it provides full tax exemption.
LIC website mentions this very clearly as below:
"Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof , under an insurance policy , ( other than a contract for a deferred annuity,) issued on or after the 1st day of April 2012 shall be eligible for deduction only to the extent of 10% of the actual capital sum assured."
Source - http://www.licindia.in/tax_benefit.htm
Therefore, the life insurance premium in an year should not be more than 10% of the sum assured. Since all single premium plans charge all premium at once, the premium is always more than 10% of the sum assured.
The same amount of premium is spread over several years in regular premium policies and hence it provides full tax exemption.
Example
Lets understand this with the premium and tax rebate comparison below:
Mr. XYZ
Age : 30 year
Age : 30 year
Term: 20 years
Sum Assured : Rs 1,00,000.00 (Rupees One Lakhs only)
Single Premium (One Time) : Rs 61,255.00
Tax Rebate (One Time) : Rs 10,000 (Tax rebate cannot be more than 10% of sum assured)
Regular Premium annually: Rs 4,996.00
Tax Rebate annually : Rs 4,996.00
As we can see from the example above that we do not get full tax rebate in single premium policy as compared to the regular premium policy.
Lesser Returns
All single premium policies fetch lesser returns because of two basic reasons. First, customers do not get the complete tax rebate u/s 80 C and second, they pay all premiums at once.
If someone wishes to invest in lump-sum, he/she should rather invest in a Bank fixed deposit with minimum 5 year lock-in period, Tax Saving Company Bonds or Post Office National Savings Certificates(NSC), because these all provide complete tax rebate u/s 80C.
Conclusion
Single premium policies are good for those who have irregular source of income and who do not care much about the tax benefit while buying an insurance policy.
