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Life insurance is one of the most important financial planning and life decisions to make. However, the plan for buying life insurance requires some basic understanding of the product and related aspects tagged along. One of these is the premium that you pay on your insurance.
What is insurance policy premium?
Premium is the amount paid by the policy bearer against the benefits of a life insurance policy . An insurance premium also serves as a guarantee that the insurer must pay benefits as mentioned in the policy to the beneficiaries. Insurance premium can be paid in two ways- Single premium or Regular premium. Depending upon the cashflow provisions , the payment can be decided.
Here is everything you need to know about the premium types to make an informed decision:
| Elements | Single premium | Regular premium |
| Cost | Cost is the primary factor that comes to mind while planning for insurance. If you opt for a single premium policy, you must pay the complete premium amount at once at the time of purchase. Under the single premium option, you may end up paying extra in terms of the time value of money. | Under the regular premium option, the payment is made regularly over a specified tenure for a pre-determined amount. Regular premium generally accounts for a more cost-efficient way of buying an insurance policy. |
| Convenience & affordability | Affordability and convenience come hand in hand in case of insurance premium payment. In this option, since the payment needs to be made upfront, it may put a little stress on your pocket. | A regular premium option accounts for regular payment of the money for a given period, most of the policyholders find it more convenient and less stressful on their pockets. |
| Risks and Returns | When you opt for a ULIP policy, you are essentially investing in the mutual funds linked with insurance policy. Under the single premium payment plan, your total payment gets exposed to the uncertainties of the market at once accounting for a higher risk. | When you opt for a ULIP policy with a regular premium payment, you gradually and regularly induce money in the market which hedges against the potential risk. This is similar to investing with SIP, the payments are gradual and regular and hedge against the market uncertainties. |
| Taxation | Irrespective of the premium payment type, a life insurance policy premium is eligible for the tax benefits under section 80C. | Irrespective of the premium payment type, a life insurance policy premium is eligible for the tax benefits under section 80C. |
Conclusion
Insurance policy premium payment is a matter of choice as it depends highly on the liquidity requirements of the family, which is primary to all financial decisions. A regular payment inculcates discipline in the investor for future finances.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.