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Single Premium Term Insurance

A single-premium term plan is a life insurance policy requiring the policyholder to pay a lump sum premium at the time of purchase.

  • 3,072 Views | Updated on: Dec 21, 2023

Insurance plays a crucial role in financial planning, providing a safety net for individuals and their families in times of need. While term insurance is a popular choice for many, a unique variant, Single Premium Term Insurance, offers distinct advantages.

Key takeaways

  • When a policyholder wants to pay the entire premium in one go, they can opt for a single premium term plan.
  • One of the most significant advantages of a single premium life insurance policy is its convenience.
  • Single premium term insurance policies typically offer flexible terms that can be customized to meet your specific needs.

Life insurance plans offer a great deal of flexibility in terms of both premium payment and payout modes. However, out of the different payment modes that most insurance companies provide, single premium payment is one of the most sought-after options.

What is a Single Premium Life Insurance Policy?

A single premium policy is a type where the policyholder pays the entire premium amount at the start of the policy term. Single-premium life insurance policies are their ability to finance long-term care using policy loans or by covering it with a rider.

Why You Must Opt for a Single Premium Life Insurance Policy?

A single-premium life insurance policy is a type of policy that requires you to pay a lump sum premium upfront in exchange for a death benefit. This type of policy is also known as a “paid-up” policy since no future premium payments are required.

Here are some reasons why you must opt in for a single premium life insurance policy:

Convenience

One of the most significant advantages of a single premium life insurance policy is its convenience. You do not have to worry about making premium payments every month, quarter, or year. This can be especially helpful for those with a high net worth and can afford to pay a large sum upfront.

Savings

A single premium life insurance policy can help you save money in the long run. Since you are paying the premium upfront, you can avoid the interest and fees associated with paying premiums over time. Additionally, if you invest the money that you would have used to pay premiums in a high-yielding investment, you could potentially earn a higher return than the interest rate offered by the insurance policy.

Estate Planning

Single premium life insurance policies are an excellent option for estate planning. They provide an immediate death benefit, which can help your beneficiaries pay any estate taxes that may be owed upon your death. Additionally, since the policy is paid up, your beneficiaries will receive the full death benefit without any deductions or fees.

Peace of Mind

A single premium life insurance policy provides a guaranteed death benefit, meaning your beneficiaries will receive a lump sum payment upon your death. Knowing that your loved ones would be financially taken care of in the event of an unexpected incident might give you peace of mind.

Benefits of Single Premium Term Insurance

Single premium term insurance policy offers several benefits that make it a smart choice for those looking for a simple and effective way to protect their loved ones financially. Now, let us take a closer look at some of the benefits of single-premium term insurance:

Lower Long-Term Costs

One of the most significant benefits of single-premium term insurance is that it can be much less expensive in the long run than other types of policies. By paying a lump sum upfront, you can avoid paying ongoing premiums, which can add up to a significant amount of money over time. This can be especially beneficial for those who want to minimize their long-term costs or who have a lump sum of money available to put toward life insurance.

Immediate Coverage

Another advantage of single-premium term insurance is that coverage begins immediately after you pay. This means your loved ones will be protected immediately without any waiting periods or delays. This can be especially important for those in poor health or with a high-risk occupation, as qualifying for other life insurance coverage can be more challenging.

Flexible Terms

Single premium term insurance policies typically offer flexible terms that can be customized to meet your specific needs. You can choose the length of the term, the amount of coverage, and other features to create a policy that works for you. This can be especially helpful for those who want to tailor their coverage to fit their unique situation, such as those who have specific financial obligations or dependents to provide for.

No Ongoing Commitment

One of the most significant benefits of single-premium term insurance is that no ongoing commitment is required. Once you make your payment, you have coverage for the entire term. There are no ongoing premiums to worry about, and you can let the policy expire at the end of the term if you no longer need the coverage. This can be especially beneficial for those looking for a short-term solution or who cannot commit to ongoing premiums.

Tax Benefits on Single-Premium Insurance

One of the primary advantages of single-premium insurance is the tax benefits it provides under Section 80C of the Income Tax Act. Premiums paid for life insurance policies, including single-premium policies, are eligible for deduction up to a maximum limit of ₹1.5 lakh in a financial year.

It is important to note that the sum assured should be at least 10 times the premium paid for the policy to qualify for tax benefits under Section 80C. This provision ensures that the policy primarily serves the purpose of life protection rather than being solely an instrument for tax planning.

Tax-Free Maturity Proceeds under Section 10(10D)

Another significant advantage of single-premium insurance is the tax exemption on maturity proceeds under Section 10(10D) of the Income Tax Act. According to this section, any amount received on the maturity of a life insurance policy, including single-premium policies, is exempt from income tax.

To be eligible for this exemption, the annual premium should not exceed 10% of the sum assured for policies issued after April 1, 2012. For policies issued before this date, the threshold is 20%. If the premium exceeds these limits, the maturity proceeds become taxable.

Eligibility and Documents Required to Apply for a Single Premium Term Plan

A single premium term plan is the most basic type of coverage. These policies offer you and your family long-term financial security against unforeseen events in life. In addition, these plans significantly protect your loved ones during uncertainties by providing financial support in your absence at pocket-friendly premiums.

The buying process is hassle-free and requires limited documentation. However, consider the documentation necessary for applying for a term plan. This is because having the proper documents handy expedites the purchase process and increases your chances of getting the policy accepted and approved.

Following are the documents required for the single premium term insurance plan.

Proof of Identity

Any official document or ID proof, such as a PAN card, Aadhaar card, voter’s ID card with photograph, passport, etc., are considered valid documents for identity proof.

Proof of Age

Your age affects various aspects of the insurance plan, including the premium price, your eligibility, and occasionally even the length. You can present your birth, marriage, or other official documents as proof of age.

Proof of Medical History

You must share your previous medical records with the insurer before buying a term plan since your medical history may significantly determine the premium and amount insured.

Proof of Address

The documents required for term insurance understand this head can be the same as identity proof: electricity, water, or other utility bills.

Proof of Income

You can submit salary slips for the last three months or bank statements for the previous six months. Additionally, you can share your latest two years’ income tax return. Additionally, salaried individuals can also share the latest Form 16. However, self-employed individuals can share their ITR filing details or Form 26 AS.

How is a Single Premium Calculated?

Given below are the steps to calculate the single premium.

Step 1: Determine The Sum Assured

The first step in calculating the single premium is determining the sum assured. The sum assured is the amount of money that the policyholder or their beneficiaries will receive in case of the occurrence of the insured event. The sum assured is usually determined based on the policyholder’s age, health, and other factors that impact their life expectancy.

Step 2: Consider The Policy Term

The next step is to consider the policy term and the duration for which the policy will remain in force. The policy term is usually based on the policyholder’s age, financial goals, and other factors impacting their insurance needs. A longer policy term will require a higher single premium, while a shorter one will require a lower single premium.

Step 3: Calculate The Premium Rate

The premium rate is the premium the policyholder must pay per unit of sum assured. The insurance company determines the premium rate based on various factors, such as the policyholder’s age, health, and lifestyle habits. The premium rate varies for insurance policies, such as term, whole life, and endowment.

Step 4: Use The Premium Calculation Formula

Once the sum assured, policy term, and premium rate are determined, the single premium can be calculated using the premium calculation formula. The premium calculation formula varies depending on the type of insurance policy.

For instance, in the case of term insurance, the premium calculation formula is:

Single Premium = Sum Assured x Premium Rate x Policy Term

On the other hand, in the case of whole life insurance, the premium calculation formula is as follows:

Single Premium = Sum Assured x (1 + Premium Rate)^(Policy Term) / (1 + Discount Rate)^(Policy Term)

Step 5: Compare The Premiums

Once the single premium is calculated, comparing the premiums offered by different insurance companies is essential. The premium amount may vary depending on the insurer’s financial strength, underwriting policies, and other factors. Choosing an insurance policy that offers adequate coverage at a reasonable premium is recommended.

Final Thoughts

A single-premium term plan is a life insurance policy that requires a one-time premium payment for a fixed term. It provides a lump-sum benefit to the nominee in case of the policyholder’s untimely demise. Single premium term plans offer tax benefits to policyholders under Section 80C of the Income Tax Act, 1961. It is important to note that tax laws may vary occasionally, and policyholders should consult their tax advisors for specific guidance.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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