Difference Between Regular Premium Vs Single Premium Life Insurance

In insurance, making the right choice between different premium payment options can significantly affect your financial strategy. One of the most critical decisions for purchasing life insurance is choosing how you will pay your premiums. The two most common premium payment modes are single premium and regular premium.

Understanding the differences between these two options is essential as it helps in deciding which premium mode aligns with your financial objectives, and long-term goals. In this article, understand the intricacies of regular premium vs single premium, how they work in different scenarios, and which one might be the best fit for you.

In a regular premium policy, the person pays for their insurance at regular intervals, which can be monthly, yearly, or another set period throughout the policy's duration. Many people prefer this type of policy because they can set up automatic payments using different apps.

Below, we have compared both types of insurance to help you decide which one suits you best.

1. Expediency

2. Affordability

The frequency of your premium payments depends a lot on your current financial situation and future planning. If you can accumulate a lump sum amount for a single payment of premium, this option can work out fine for you.

It might disrupt your budget for the rest of the year or for a few upcoming months; however, you won’t be burdened with the worry of making periodic payments.

Salaried individuals may find the regular payment option more suitable as the total premium amount gets distributed over a specific tenure, which does not upset the regular cash inflow and outflow. Also, with modern options such as ‘auto-debit,’ defaulting in regular payments might not be a problem.

3. Return on Investment

If you opt for the regular premium option, the premium amount gets spread across a longer tenure. Although the burden gets lowered, single premium policies cost less than regular premiums.

Have a look at this example for better understanding.

Suppose Karan has to pay an annual premium of ₹5000 for 10 years for a sum assured of ₹1,50,000. Now he has to pay a total premium of ₹50,000 over the tenure. However, the insurer offers him the option to pay a lump sum premium amount of ₹40,000. This helps him save ₹10,000.

While the lump sum payment seems cheaper initially, considering inflation, the regular premium payments might be more beneficial as the value of money decreases over time.

If we take inflation into account while doing this calculation, the scenario will be a little different. With a rate of inflation at 6%, the value of ₹40,000 will be ₹ 86,517 in the next 10 years. From this perspective, the single premium option seems like a loss.

Therefore, you must take inflation into factor while deciding upon a payment mode.

4. Customisability

A single premium policy lets you pay the entire premium amount upfront at once. But with a regular premium policy, you will have to pay premiums over the years, which provides you with the added advantage of customising your premiums at any time.

For example, if you add riders or increase the sum assured amount, it will change your premiums because you availed added benefits. With a single premium payment, this customisation might be a little bit tricky.

5. Risk

Insurance is a long-term investment. Hence, if you make a single premium payment, your money gets locked in for a specific tenure. This makes your investment open to market volatility and its adverse effects. 

However, with regular payment, you can take advantage of ‘rupee cost averaging,’ which is the process of averaging the cost of investment during different investment cycles, which shields your investment from market volatility.

6. Extended Benefit

With regular payment policies, you can add extra features called riders to increase your financial protection. These riders cost a little more but give you extra payouts on top of your main coverage. For example:

• Accidental death benefit rider: Gives extra money if you die in an accident.
• Critical illness rider: Pays a lump sum if you are diagnosed with certain serious illnesses.

These benefits might not be available with single premium policies.

Regular premium policies also often include premium waivers for permanent disabilities. This means the insurer will pay all future premiums, and your life cover stays active until the policy ends. But with single premium policies, you’ve already paid everything upfront, so you can’t get these extra benefits in such cases.

7. Tax Benefit

You can avail certain tax benefits if you purchase life insurance or general insurance policies. As per the Income Tax Act, 1961, Section 80C, you can avail tax deductions of up to ₹1,50,000 on the yearly premium paid towards your insurance. However, the tax benefits depend on the prevailing tax regime.

However, if you make a one-time payment, you can avail this deduction only for that particular financial year when the payment is made. Hence, if you pay premiums periodically, you can take advantage of this deduction till the end of the policy tenure. 

Sarah, a successful 45-year-old businesswoman, has always been diligent about her finances. She decided to secure her family’s future with a life insurance policy in case something happened to her. She selected a ₹1 crore life insurance policy for a duration of 25 years.

Given this scenario, let's look at two different premium payment options Sarah might have:

Scenario 1: Sarah opted for a single premium payment option for her life insurance policy. By paying a lump sum of ₹15,00,000, she secured immediate coverage for the entire policy term without the need for future premium payments. This option appealed to Sarah as it allowed her to fully fund the policy upfront, eliminating the worry of ongoing premium payments.

Scenario 2: Sarah explores a regular premium payment plan with an annual premium of ₹60,000 to keep the policy active. This approach offered her the flexibility to manage her finances more effectively by spreading the cost over time. It also gave her the liquidity to address emergency financial needs without compromising.

Key Considerations

• In both scenarios, should Sarah pass away during the policy's term, her beneficiary would receive a tax-free sum assured of ₹1 crore, ensuring their financial well-being.
• It is important to note that this life insurance policy does not offer maturity benefits. Therefore, if Sarah outlives the policy term, she will not receive any return on the premiums paid.
• The primary purpose of the premiums is to provide life coverage rather than an investment.

Single Premium Policies

Regular Premium Policies

Despite the benefits, single premium insurance isn’t for everyone. Here are some potential downsides:

• Requires a significant lump sum payment, which may not be feasible for everyone.
• Once the initial payment is made, you cannot add more funds to the policy.
• Often classified as a Modified Endowment Contract (MEC), leading to stricter tax consequences on withdrawals.
• Substantial surrender charges may apply if you decide to end the policy within the first few years.
• Lack of flexibility in adjusting the policy or making additional contributions.

While regular premium policies are more accessible, they also have some drawbacks:

• Requires continuous premium payments, which can be a financial burden over time.
• The total amount paid over the life of the policy can be higher compared to a single premium policy.
• If you miss a payment, the policy could lapse, resulting in loss of coverage.
• Managing regular payments and keeping track of due dates can be burdensome.
• Some policies may have premiums that increase over time, adding to the financial burden.

Your Financial Capacity

Investment Goals

Risk Tolerance

Tax Considerations

Investment Horizon