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Single or regular premium term plan?

You can buy term insurance with a single lump sum premium or pay premiums over a period of years. Find out which is better

How should you pay for your life insurance policy? In one go, or with annual premiums? Your bank may advise you to buy a single-premium term policy to cover the home loan you are taking, and you may find it convenient as well. However, there are many factors to consider. Here is why regular premium plans are a better deal.

Basic difference

Single premium options let you pay for your policy upfront, as a lump sum. This also means you need to make a higher upfront payment. With regular premium plans you can pay the premiums periodically: either throughout the policy term or for a limited number of years. Given that you can spread the payment over many years, the premiums are more affordable.

Cover and tax benefits

With single premium plans, the minimum sum assured is 125 per cent of premium, if you are below 45 years. This minimum threshold does not qualify for tax benefits, as you need an insurance cover of at least 10 times the annual premium to qualify. Regular premium plans qualify, as the minimum sum assured is 10 times the annual premium for those below 45, with at least a 10-year policy.

Commissions

With single premium plans, the agent gets a one-time commission, which is capped at 2 per cent of the premium. For regular plans, the commissions are linked to the premium payment term. The first year commission is capped at 35 per cent for insurance companies that are at least 10 years old. Subsequently, it is capped at 7.5 per cent and from the fourth year onwards, it is capped at 5 per cent.

Long-term advantage

In single premium plans you pay upfront for a term that you may not need. If death occurs in the 5th year, premiums for 20 years would have been paid already. While the amount of premium paid is more with regular plans, keep in mind the time value of money. This means that over time, as you factor in inflation, the annual premiums will actually be cheaper.