Purchasing Life Insurance is a complicated process. It includes so numerous choices including single or regular premium. To begin with, you need to sort out what amount of protection you need? Which is the best life Insurance organization? Whenever you are done with these the following question is what type of insurance plan to buy – endowment, ULIP, or term plan.
Even in each plan, there are multiple types of schemes. You need to be aware of those following things and then decisions to be made.
- Pure Term Insurance Vs Return of Premium Plan (Moneyback Policy)
- Premium Payment Term – Monthly, Annual or Single
- The benefit to be paid to the nominee – one time or in installments
- Increase insurance annually (top-up)
- Multiple riders and so on ….
I considered doing a series of articles that would assist our readers to take the decision on the above points. This article covers the point that you should pay a premium yearly or only one time as a single premium.
Single or Regular Premium for Life Insurance?
let’s assume Life Insurance for a 30-year old healthy male insured for 30 years for the amount of Rs 1 crore. Regular Premium Rs 10,000/yr or Single Premium Rs 1,70,000/one time.
There are three important reasons I prefer Annual Payment of life insurance premium
Cheaper than single premium payment: In the case of a single premium you would pay Rs 1.7 lakhs while if you choose annual payment, you pay Rs 3 lakhs (10,000 X 30). This seems like a single premium policy is 43.3% cheaper than an annual payment. But hold when you consider the time value of money that time it will be the opposite.
Affordability: The single premium is Rs 1.7 lakhs Vs an annual premium of Rs 10,000. For most people, the single premium may not be affordable.
Portability: If you pay the premium in one go you cannot change the insurance provider in the future. In case your life goals are achieved and you no longer want to continue insurance, you cannot do so.
Here is a simple trick which would tell you how expensive is Single Premium.
Assuming that you can afford the premium of Rs 1,70,000 – you have 2 options to go
- Pay the amount as a single Premium or
- Pay the annual premium and invest the rest to generate future premiums
Here is some calculation to illustrate the above point(2):
- Annual Premium = Rs 10,000
- Money Left after 1st year Premium = Rs 1,60,000 (1,70,000 – 10,000)
Now invest this remaining Rs 1.6 lakhs in simple bank FD or good-rated bonds (these days the interest rate on AAA-rated NCDs are more than 9%). You can easily expect an annual return of 6.5%-7%.
So every year you would get Rs 10,400 (6.5% of 1,60,000). You can pay this amount as annual premium next year. This can continue for 30 years.
At the end of 30 years, you would have paid all the premium and still have Rs 1.6 lakh invested with you. Hence you can see the single premium is much more expensive than it seems!
Who should choose Single Premium Payment?
Single premium payment is appropriate for people who have uneven income or for somebody who isn’t disciplined to pay premium routinely. Yet, I think in both cases, people can do Bank FD with the yearly installment of premium and set-up auto compensation for the insurance premium consistently. This is a lot more smart way and saves you a good amount of money along with other benefits of paying life insurance premiums annually.