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Single Premium or Yearly Premium for Life Insurance – Which is better?

Life Insurance

Deciding on Life insurance is complicated process and once you have decided on the insurance amount, insurance tenure and which company and plan to go for, the last decision to be made is weather you should opt for single premium or Yearly premium payment?

I favour Yearly premium payment over single premium policies because of the following reasons:

  • Portability: This is more relevant for term life insurance. If you have paid the entire premium then you cannot change your life insurance provider nor you can stop the premium payment if you no longer need insurance.
  • Liquidity: You need to pay almost 5 – 15 times more premium in case of single premium, which makes it unaffordable for most.
  • Cheaper than single premium payment: The example below would illustrate how Yearly Premium is cheaper than Single Premium for same life insurance.

For the illustrative purpose I have taken example of LIC Amulya Jeevan – a term life insurance plan.

Following are the details:

  • Age at insurance: 30 Years old healthy male
  • Sum Assured: Rs. 1 Crore
  • Policy term: 35 Years
  • Yearly Premium: Rs. 38,800 for 35 years – payable every year
  • Single Premium: Rs. 5,58,700 – payable once

Total premium paid in 35 Years (in case of Yearly Premium) = 38,800 X 35 = 13,58,000

So the above calculation shows that you would end up paying Rs. 13.6 lakh if you choose Yearly premium payment while you would only pay Rs. 5.6 Lakh in case you opt for single premium.

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A discount of approximately 60% over Yearly premium payment. 

So is Single premium payment is what your should opt for?

Probably No!

Here are Six steps how you can utilize your single premium amount of Rs. 5,58,700 in a better way.

  1. Opt for Yearly Premium payment plan.
  2. Pay Rs. 38,800 as the first premium. You are now left with Rs. 5,19,900 (5,58,700 – 38,800)
  3. Do fixed deposit for Rs. 5,19,900 such that you get at least a post tax return of 7.5% or more Yearly. (You can easily get this kind of return from bank, post office deposits or bonds)
  4. Assuming 7.5% Yearly return – you would get Rs. 38,992 per annum. You can use this to pay all the future (Yearly) premium for your policy.
  5. At the end of policy term you would be left with Rs 5.2 Lakh in your account and all premiums paid.
  6. In case you die in mid of policy – your dependent would get 1 crore and also the Rs. 5.2 lakhs you have in your fixed deposit.

To conclude, you should always do your calculation when you need to decide on the Single Vs Yearly Premium payment for Life Insurance and in most of the cases the above strategy of opting for yearly premium payment over single premium payment plan should work for you.

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Amit

Hi Readers! I am Amit, the mind behind Apnaplan.com I am MBA from NITIE, Mumbai and BIT from Delhi University. This blog is my online diary where I write about my tryst with my investment decisions. In the 400+ posts on this blog you will find articles on Personal Financial Planning, Investments, Retirement Planning, Insurance, Loans, Fixed Deposits, Provident Funds, Stock Markets, Gold, Silver, Real Estate Investment, Credit Cards, Credit Score, Taxation, Inheritance Planning and Reviews on various Financial Products.

View Comments

  • Also, we wont get TAX benefit for the amount over and above Rs. 1 lakh u/s 80c. for the above premium of Rs. 5.6 L, you end up losing TAX benefit worth Rs. 46000 (assuming just 10% IT bracket) or Rs. 1,36,472 over 35 years (assuming worst case scenario - your income doesn't reach the 20% bracket)

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Published by
Amit
Tags: LICLife Insurance CorporationTerm Plan
February 27, 2012 6:15 pm

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