Difference between single and regular premium in life insurance

Life insurance is a critical consideration when planning your life. As essential as it is to cherry-pick investments that fit your financial goals, it is also important to have a backup plan to tackle unpredictable situations. At such times, a life insurance policy is a perfect way to ensure your finances are protected.

There are myriad life insurance plans that are available. Selecting one is often a bewildering decision. But it must not be based on intuition or suggestions from your family and friends. Instead, it should be a well-evaluated decision based on your requirement checklist. While you consider the several factors involved, the premium is one of the critical considerations. As a policyholder, you have two options — to pay a single premium or to pay regular premiums over a specified tenure. This article explains the differences between single and regular premiums in life insurance plans helping you make an informed choice.

  • How do you pay for it?

A consideration when the option for single premium or regular premium life insurance plans is its affordability. How you plan to pay for it is an essential determinant that decides what you must select.

For instance, if you are paying with the accumulated savings which are lying idle, then a single lump sum payment is a wise choice. In other situations where your monthly income is supporting the payment of your life insurance with the various life insurance rider plans that are available, a regular payment is an appropriate choice. Further, making an upfront single payment for the entire policy tenure might even fetch you discounts making it a more affordable purchase. Therefore, considering your income sources, the choice of a single premium or regular premium policy is a subjective decision.

  • How is it convenient to pay?

Depending on whether you are self-employed or a freelancer, the consistency of your income may vary. For self-employed individuals, the incomes may not always be consistent. Hence, it can become difficult to pay premiums over a long period. In such situations, a single premium lifeinsurance policywith rider plans is a prudent choice.

However, for individuals that have a regular salaried income, paying a lumpsum amount can be inconvenient. They may be required to dig deep into their savings leaving them without any emergency funds. Thus, in such situations, a regular plan is the way to go ahead.

Another factor is the hassle of remembering the premium payment dates. If you are someone who does not want to have the hassle of remembering your policy premium dates, a single premium payment is right for you. Forgetting to renew your policy on time may lead to a lapse in coverage. Therefore, you must also consider your convenience regarding premium payments.

  • Are your investments affected by capital markets?

Depending on the type of life insurance policy you choose, there may be a component of the capital market affecting your investment. For instance, a Unit Linked Insurance plan (ULIP) involves investing a portion of your premium in funds that are linked to capital markets. In such a case, making a lumpsum investment by way of a single premium policy exposes you to the inherent volatility of capital markets. Thus, the fluctuations in capital markets will impact the returns offered by the ULIP.

On the other hand, regular premium payments average out your investment in the capital markets with investments being made at different time frames when the markets are low or high. Thus, you end up holding a larger number of units that appreciate in value as the capital markets begin to rise. To understand how your investment value differs, you can make use of tools such as a ULIP calculator, or a life insurance premium calculator.

  • How does it impact your taxes?

Life insurance premiums are deductible under Section 80C of the Income Tax Act. Thus, each financial year, you can claim a deduction of up to ₹ 1.5 lakhs for the premiums paid. When you purchase a policy with the single premium option, you can avail of this benefit only once at the time of its payment. However, for subsequent years, no benefit is available. On the other hand, regular premium policies allow you to take advantage of a deduction each financial year for the amount of premium with a capping of ₹ 1.5 lakhs. Thus, it is important you also consider the tax benefits you can get when you opt for a single or regular premium policy.

With these points of differentiation, it is a subjective decision based on your individual case whether you must opt for a single premium policy or a regular premium policy. In addition to considering premiums as a determinant in deciding the type of insurance cover, you can also make use of a life insurance premium calculator that helps in comparing the different available policies.