Is a single premium insurance plan a good idea? Pros and cons

Oct 10, 2019 | 1 month ago | Read Time: 2 minutes | By iKnowledge Team

What is a single premium insurance plan?

A single premium insurance plan is a plan in which all the premium is collected up front by the insurance company. No further premiums are required to be paid under the policy to the insurance company. If the policyholder dies during the policy term, the entire benefits are paid out to him. If the insurance plan is an endowment plan, then the sum assured plus bonus will be paid out. In case of a ULIP, the higher of the fund value, 105% of total premium, and sum assured will be paid out. For a regular term insurance, the death benefit amount will be paid out.

A single premium insurance plan develops a surrender value by reason of payment of lumpsum premium. As per the IRDA’s surrender value guidelines[1], if the policyholder surrenders the single premium insurance plan after one year, he will get back 90% of the lumpsum premium paid out.

Pros and Cons of a single premium investment plan:

A single premium investment plan has many benefits for an investor:

  1. Avenue to invest windfall gains:

If you’ve received a bonus or an unexpected amount of money, it can be invested in a single premium investment plan.

  1. No hassle of yearly premium payment:

For many people, the idea of paying premiums yearly is a huge hassle. In case premiums are not paid, it causes the policy to lapse which can cause losses in terms of bonuses. To avoid this, opting for a single premium insurance plan is convenient.

  1. Same benefits as a regular insurance policy:

A single premium investment plan has the same benefits as a regular insurance policy. These insurance policies also earn bonuses and other benefits. The only difference is that the premium is collected in one go.

However, a single premium insurance policy has the following cons over a regular insurance policy:

  1. Premium does not consider time value of money:

It may arithmetically seem like a gain when you invest in a single premium insurance policy, but the premium fails to consider the time value of money. While they have lower overall premiums than other policies, by paying a lump-sum amount upfront, you lose out on an amount equivalent to the opportunity cost of that capital amount.

  1. No loan advantage:

It is not possible to take a loan against a single premium insurance plan as compared to a regular insurance policy.

  1. Exposure to market risks:

This is applicable to ULIPs. By investing a lumpsum amount in a fund, the investment is not protected against market risks. In a regular ULIP, small sums of money are invested at regular intervals, and the gains and losses are averaged out over a period of time. This advantage is lost in a single premium investment plan.

  1. Loss in case of death:

If the policyholder dies during the policy term, no future premiums are payable. If the policyholder opts for a single premium insurance plan, the premiums have already been paid upfront. This causes a loss of extra premium that would otherwise not have been payable.

A single premium insurance plan is an investment option for people, even though the cons overweigh the pros. If you have a windfall amount to invest, it makes sense to get additional insurance coverage, and this plan helps in that. Consider all avenues and every facet of an insurance policy before you invest, and then stay worry-free. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

[1] http://dhc.co.in/uploadedfile/1/2/-1/IRDAI(Acquisition%20of%20Surrender%20and%20Paid%20Up%20Values)%20Regulations%202015.pdf


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