Single Premium Policy: What it is & How it Works

Life is unpredictable and it is impossible to know what the future holds. But there are certain ways in which you can help your loved one's tide over difficult times. Planning your finances carefully and ensuring your family is secure when you are not around is one of the most important things you can do.This is where a Life Insurance Plan comes into play, as it can assure your family of financial stability even in your absence.

The insurance market in India has shown continuous and rapid growth over the last few years. Today, there are numerous products on offer from both domestic and foreign insurers. You can pick from multiple types of policies, such as Term Life Insurance, Endowment, Whole Life Insurance , Money Back, and Unit Linked Insurance Plan (ULIP) . Each type has its own benefits and drawbacks. By assessing your needs and the different available options, you can pick one that suits you best.In recent times, single premium Life Insurance has emerged as an attractive option for those who want to make a one-time investment while enjoying long-term coverage. Let’s learn a little more about single premium Life Insurance plans.

A single premium Life Insurance policy involves paying a one-time lump sum premium upfront to the insurer in return for insurance coverage for a specified period.Single premium Life Insurance makes a good addition to your investment portfolio if you have a large amount of funds lying idle and want an investment product that ensures financial security to your family after you have passed on.An added benefit of this plan is that you do not have to worry about missing a premium payment or your policy lapsing in the future.

Single premium Life Insurance plans can be either term or traditional. This means you can use them both as life cover and as a savings plan.

Single premium life term plan

Here, you only receive the death benefit. You do not get the maturity benefits that traditional Life Insurance policies typically offer.

Single premium life traditional plan

This type offers a couple of options. Under the Single Pay Endowment policy, you receive a lumpsum return in the form of sum assured plus a bonus at the end of the policy term. The bonus you receive depends on the returns earned by the insurer after investing your funds.Alternatively, you can opt for an Income Plan. Through this option, you can defer the income for a specific period, say five or ten years. At the end of this period, you start earning a fixed sum based on your sum assured.Let’s try and understand the workings of Single Premium term policy with an example.Let us assume you are a 35-year-old non-smoker and choose to purchase a single premium policy with a death benefit of ₹ 1 crore. The premium amount is ₹ 25,000 and you make a one-time lump sum payment at the time of purchasing the policy. It is valid for the next 20 years (typically, single premium policies are valid for 10 to 30 years).Now, if you pass away at age 50 i.e., during the policy term, the insurer will pay your nominee the sum assured of ₹ 1 crore. However, if you live past 55 years, or the 20-year policy term, you will not receive any payout.It is essential to carefully read the terms and conditions before deciding to buy a policy. This is because the death benefit may also be subject to certain conditions and exclusions. For example, single premium life plans do not cover death by suicide, or from participation in dangerous activities.

Although a single premium Life Insurance means having to shell out a larger sum in one go, it comes with a set of benefits.

1. Quick access and ease of use One of the most important benefits of this Life Insurance policy is that the complete coverage becomes available to you immediately after paying the premium. You also never have to worry about keeping track of future premium payments.
2. Cost benefits and better terms There is a cost attached to the administration and processing of multiple premium payments. As you pay the entire premium in one go, the insurer may charge you lower processing fees and offer better terms at the beginning.
3. Periodic withdrawal Some traditional policies also allow your family members to draw periodic benefits from the death coverage to meet expenses. The amount withdrawn gets deducted from the total sum assured until it is completely exhausted. This provides them with long-term benefits without the hassle of looking for alternate ways to invest the money.
4. Use of idle funds: Single premium life plans are a good option if you have a large sum of money (through inheritance, bonus, etc.) at your immediate disposal.

However, while it offers several advantages, single premium Life Insurance policies also have some drawbacks. One disadvantage is that you lock in a large amount and may not have the liquidity if another good investment opportunity comes your way. Additionally, the premium amount can be considered for tax benefits only in the year that it is paid.

Tax benefit of single premium Life Insurance

• Under Section 80C of the Income Tax Act, 1961, there is tax exemption on Life Insurance investments of up to ₹1.5 lakh for those who wish to follow the Old Regime.If you purchased a Life Insurance policyafter 1 April 2012, the premium paid should not exceed 10% of the sum assured for tax exemption.
• Under Section 194DA of the Income Tax Act, 1961, the maturity amount from your Life Insurance policy will be subject to tax at source (TDS) of 5% on the ’income’ component of the Life Insurance policy (that is the maturity amount). There will be no TDS if the premium is less than 10% of the insured sum for policies issued after 1 April 2012.
• Effective 1 April 2023, if the total premium from all your traditional Life Insurance policies i.e., the aggregate premium is under ₹5 lakh, then all maturity proceeds received from such policies will be tax free. This does not affect the policies that have been issued up to 31 March 2023.
• The death benefit that your nominee receives from the insurer is completely tax-free under Section 10(10D) of the Income Tax Act. This is irrespective of the amount of premium.

How to buy single premium Life Insurance plans

Once you choose an insurer, you can follow these few steps to buy a single premium Life Insurance policy online.

• Navigate to the Life Insurance page of the chosen insurer. Browse through the available insurance plans. Here you can choose the term duration, coverage amount, premium amount and the single payment option.
• Next, you need to add a nominee, i.e., family members who will benefit from the life coverage.
• The insurer then carries out the necessary verifications before issuing the policy to you.
• After making the premium payment, the insurer will send you the policy documents in both physical and electronic copies.
• You need not pay any further premium and the insurance policy is now yours for the entire term. In the event of your untimely demise during the term, the insurer will compensate your nominee with the assured sum.
• If your policy matures and the term ends, the insurer will compensate your family based on the type of Life Insurance policy held.

• A single premium Life Insurance policy is ideal only if you have enough surplus money to spend in one go.
• Single premium policies are convenient as you need not worry about your policy lapsing and the benefits kick in immediately.
• Single premium policies are flexible and allow you to pick a policy that caters to your specific requirements.
• There are significant tax benefits associated with single premium policies.