Single Premium Term Insurance Plan in India

Regarding life insurance, individuals often seek a solution that provides comprehensive coverage with minimal hassle. Unlike traditional term insurance plans requiring regular premium payments, single premium term insurance allows policyholders to make a one-time lump sum payment at the beginning of the term. 

Let us read more about a Single Premium Term Insurance Plan and how this plan can secure your family's future.

Single Premium Term Insurance is a type of life insurance policy in which the policyholder pays a lump sum amount (the single premium) upfront instead of making regular monthly or annual payments. This single payment covers the entire duration of the policy, providing coverage for a specified term.

This type of insurance plan is ideal for those who prefer the simplicity of a single payment and desire long-term financial security for their loved ones. The maturity benefits of a single premium policy are tax-free under certain conditions. It is advisable to consult tax regulations or a financial advisor for specific policy details.

In the event of the policyholder’s death during the term, the beneficiaries receive the death benefit.

Single Premium Term Insurance works similarly to traditional term insurance, with the main difference being the payment structure. Here's a step-by-step breakdown:

• Application and Underwriting: The applicant applies for the policy, and the insurance company assesses the applicant’s health, age, lifestyle, and other factors to determine eligibility and premium amount.
• Payment of Single Premium: Once approved, the policyholder makes a one-time lump sum payment. This single premium covers the entire term of the policy.
• Coverage Period: If the policyholder passes away during this term, the beneficiaries receive the death benefit.
• End of Term: If the policyholder survives the term, the policy expires, and no death benefit or premium is paid.

Illustration of Single Premium in Term Insurance

Sidharth Kumar, a 35-year-old software engineer, always prioritized his family's security with his wife Meena and their two children. Sidharth wanted to ensure their financial stability, no matter what life threw at them. After much research and discussions with financial advisors, he purchased a single premium term insurance policy.

Based on his family's needs, he chose a policy with a sum assured of ₹1 crore term insurance for 20 years. Sidharth found a competitive rate of ₹4,00,000 as a single premium for the desired sum assured and term.

If Sidharth had opted for an annual premium policy of ₹25,000 instead, then the total premium paid for regular premium policy over 20 years would be:

₹25,000 × 20 = ₹5,00,000

By choosing a single premium policy, Sidharth saved:

₹5,00,000 - ₹4,00,000 = ₹1,00,000

This one-time investment ensured that his family would be covered without the risk of missing any premium payments in the future. Also, the premium paid qualified for tax deductions under Section 80C of the Income Tax Act.

The calculation of the single premium in term insurance involves several factors, including:

• Age: Younger policyholders typically pay lower premiums as they are considered lower risk.
• Health: Healthier individuals may receive lower premium rates. Medical exams and health questionnaires are often part of the underwriting process.
• Coverage Amount: Higher coverage amounts result in higher premiums.
• Term Length: Longer policy terms generally require higher premiums due to the extended coverage period.
• Lifestyle: Factors such as smoking, occupation, and hobbies can impact the premium, with riskier lifestyles attracting higher premiums.
• Gender: In some regions, gender can affect premium rates, with women often paying lower premiums due to longer life expectancies.

The insurance company uses actuarial tables and statistical data to assess risk and calculate the appropriate single premium for each applicant.

1. Those with a Lump Sum Available

2. People Who Prefer Simplicity

3. Individuals Looking for Long-Term Coverage

4. Those Seeking Guaranteed Coverage

5. People Involved in Estate Planning

6. Investors Looking for Tax Benefits

Single Premium Term Insurance Plans come with their own set of benefits. However, these benefits might apply to one person and not to others. You can assess your situation and requirements and accordingly plan to buy a term plan variant.

Here are a few scenarios where opting for single premium term insurance can be advantageous:

1. You are in a Profession with Irregular Earnings

When you are in a volatile profession with irregular earning, a single premium term insurance is more beneficial since you need not commit to regular premium payments. 

You can buy the plan whenever you have a surplus for investment, thus ensuring that your life is adequately covered even during phases of low earnings.

Certain professions, such as freelancers, artists, or entrepreneurs, often experience fluctuations in income. 

Being in a profession with irregular earnings can pose several financial challenges, including difficulty managing consistent expenses like insurance premiums. Single Premium Life Insurance (SPLI) offers a solution. By making a one-time payment, you secure life coverage without ongoing premiums. 

This flexibility is ideal for freelancers, artists, and entrepreneurs. SPLI provides financial security, reduces payment stress, and allows you to protect loved ones even during income downturns.

Risks of Irregular Earnings:

• Inconsistent cash flow makes regular premium payments difficult.
• Financial uncertainty can lead to policy lapses.
• Increased stress from managing ongoing financial commitments.

Benefits of Single Premium Life Insurance (SPLI):

• One-time payment removes the need for regular payments.
• Guaranteed coverage regardless of future income fluctuations.
• Simplifies financial planning and reduces stress.
• Offers potential tax benefits, providing additional financial relief.

2. You are in a Hectic Schedule

Regular payment term insurance requires disciplined premium payments, regularly and over a good number of years. If you are busy, you might forget to pay the premium on time, which may pose a risk of policy lapse.

In such a case, you might prefer paying the full premium in one go and then forget about the tension of monitoring and ensuring premium payments on time. 

3. You Have Some Lump Sum Amount in Hand

Single Premium Term Insurance allows you to invest a lump sum amount upfront, which covers the premium for the entire policy term. This eliminates the need for ongoing premium payments, providing peace of mind and financial stability. The lump sum payment ensures that your policy remains active without the risk of lapse due to missed payments. 

Additionally, the proceeds from the policy can be used to cover financial obligations, support dependents, or serve as a legacy, ensuring that your beneficiaries receive a guaranteed payout in the event of your death during the policy term.

4. You Have Received Maturity Proceeds from the Insurance 

Your life insurance policy just matured and you received the maturity proceeds. However, you want to continue the life coverage without investing any fresh amount.

In such a case, consider investing the maturity proceeds in a Single Premium Term Insurance. 

When considering a Single Premium Term Insurance policy, evaluating several factors is important to ensure it aligns with your financial goals and needs. Here are key things to consider:

• Coverage Amount: Determine the coverage needed to protect your beneficiaries and match your financial obligations.
• Policy Term: Choose the duration of the policy based on your long-term financial plans and goals.
• Cost and Affordability: Ensure you can comfortably make a single premium payment without affecting your financial stability.
• Customizable Coverage: Look for options to adjust coverage or add riders if needed.
• Riders: Explore available riders (e.g., critical illness rider, accidental death benefit rider) that can enhance your policy.
• Surrender Charges: Review the surrender charges that apply if you terminate the policy early and understand how they decrease over time.
• Tax Implications: Understand the tax benefits available for the premium paid and any tax consequences if you surrender the policy.
• Death Benefit: Verify the death benefit payout and its alignment with your financial planning.
• Policy Benefits and Features: Examine the benefits provided, such as the death benefit amount and any additional features or riders.
• Flexible Premiums: Single premium policies typically have fixed costs; assess if this suits your financial situation.
• Policy Terms and Conditions: Read and understand all policy terms, conditions, exclusions, and limitations.

Deduction Under Section 80C

• Eligibility: You can claim a deduction for the premium paid, provided it doesn't exceed a certain limit of the sum assured.
• Limit: The maximum deduction under Section 80C is ₹1.5 lakh per financial year.
• Tax-Free Death Benefit: The death benefit received by the nominee is entirely tax-free.

Eligibility Criteria

• Policies issued after April 1, 2012: The premium must not exceed 10% of the sum assured.
• Policies issued before April 1, 2012: The premium limit is 20% of the sum assured.

Tax Implications

• Premium Exceeding 10% of Sum Assured: If the premium paid is more than 10% of the sum assured, the excess amount is not eligible for a deduction under Section 80C. Additionally, the maturity proceeds may be partially taxable.
• TDS on Maturity Proceeds: If the maturity proceeds exceed ₹1 lakh, the insurer will deduct TDS at the rate of 5%. You can claim credit for this TDS while filing your income tax return.
• Taxability of Maturity Proceeds: The maturity proceeds are generally tax-free if the premium paid does not exceed 10% of the sum assured, and if the premium exceeds 10% of the sum assured, the difference between the maturity proceeds and the premium paid is taxable as long-term capital gains. You can claim indexation benefits to reduce the taxable gain.

Note: It is recommended to consult a tax advisor or financial planner for personalized guidance based on your specific circumstances.

Surrendering a Single Premium Term Insurance means terminating the policy before its maturity date. Once surrendered, the policy no longer provides coverage, and the beneficiaries will not receive any death benefit in the event of the policyholder’s death. 

Considering you have paid the entire premium upfront, surrendering the policy can result in a significant financial loss as you will get back much less than what you invested.

Here is what typically happens:

Surrender Charges

Surrender Value

You might receive a surrender value, which is a part of the original premium paid. This amount is generally lower than the initial premium due to charges and insurance costs.   

Calculation: Surrender value = Cash value - Surrender charge

Example: If you surrender a policy in the 3rd year with a single premium of 100,000 and an 8% surrender charge, and a cash value of 100,000

Surrender charge: 100,000 × 0.08 = 8,000

Surrender value: 100,000 - 8,000 = 92,000

Note: Always review your policy's specific terms and conditions to understand the exact financial implications of surrendering it.

Calculating the premium for term insurance involves understanding various factors. A single premium policy requires a one-time upfront payment and covers the entire policy duration.

To estimate this, you can use Digit's Term Insurance Calculator by entering details such as date of birth and annual income. The calculator provides an accurate premium estimate, simplifying the process of determining the cost of your term insurance.

Single Premium Term Insurance has benefits as it offers a one-time payment for a fixed term of life coverage. It is ideal for those with excess funds or seeking hassle-free financial planning. Provides a significant death benefit to beneficiaries while offering tax advantages on premiums and payouts. However, it requires a substantial upfront investment compared to regular premium plans.