No matter which insurance policy you choose these days, you have a barrage of options to select from. Right from the policy to riders, from the duration of the policy to the frequency of payments. One of the most difficult decisions that you will take while purchasing insurance is the frequency of payment.
You can either opt for a single premium policy or a regular payment policy. As the name suggests, for a single premium policy you would have to pay the premium amount upfront. So even if you choose a policy for a duration of 10 years, you will have to pay the premium amount in one go. Regular payment is the preferred option, where you can schedule the payments at predefined intervals like monthly, quarterly, half-yearly or annually.
Once you zero in on a policy, you need to decide the term for which you want to continue with the same. Post that you should take a call if you want to go ahead with a single premium or payment at regular installments. The total payment is more as you increase the number of installments. The reason behind this is that the insurance company charges an extra amount to allow you to pay the premium in installments.
So now the question is, should you opt for single premiums or regular payments in installments?
There are a few factors that you should consider before making that decision.
The cost of buying insurance can be a make or break factor for a lot of us. Lump-sum premium payment mode is cheaper than the regular premium mode. Let us take an example to understand this.
Mr. X and Mr. Y who choose to buy the same insurance but with different payment frequencies. Mr. X chooses for an annual payment or payment in installments of Rs. 15,000 for 15 years and ends up paying Rs. 225,000 over the entire tenure.
On the other hand, Mr. Y selects the exact same policy but opts for a single premium. He ends up paying Rs. 175000. So, Mr. Y saves Rs. 50000 straight off? Let us bring inflation into the calculations and see how that fares. Assuming an inflation of 6% annually, Mr. Y’s initial payment grows to about 373000 by the fiftieth year. Thus, he ends up paying more money for the policy than Mr. X when it comes to time.
From the above example, we can clearly see that a single premium policy would set you back substantially as compared to regular payment options. Thus, it can be out of reach for most salaried individuals or even individuals in the middle-class category. Unless you have that much liquid money available with you or are willing to withdraw any existing saving instruments, it can be difficult to pay single premiums.
When it comes to affordability, paying insurance premiums in installments scores heavily. Depending on your liabilities and responsibilities you can choose different frequencies. If you feel annual payments can pinch you financially, you can opt for half-yearly payments as well. Most insurance companies also allow you to choose quarterly or monthly frequencies. Thus, you can choose a payment mode that suits you.
Convenience is the ace card for single premium payments. Buying insurance becomes a one-time event should you choose this mode. All that you need to do is fill up the required forms and pay the premium amount in one go and literally forget that you have insurance.
Insurance products are normally for a longer tenure, somewhere above the 10 years horizon. Thus, a lump sum payment might not be the best option. If there are considerable fluctuations in the capital market, you are prone to those risks.
Thus, regular payments keep you immune to those and give you the benefits of rupee cost averaging, which is very essential. It helps you to average our benefits and lower your exposure to risk.
One of the reasons why people opt for insurance products is that it helps them with tax benefits. Most of the insurance plans help you get tax deductions under Section 80C. But as we all know, you can avail as much as 1.5 lakhs under this clause. Thus, a lump sum payment might not be the best solution.
If you choose a single premium, you can avail tax benefits only for one year and that too you might exceed the 1.5 lakh limit, thus missing out on benefits. On the other hand, if you choose regular payments, you can avail of tax cuts on each year’s premium.
Yes, you can pay insurance premiums either as a lump sum or in installments. But you should consider the above factors before deciding the frequency of payments. When you consider factors such as taxation, risk mitigation, and affordability, paying insurance premiums in regular installments makes more sense. However, if you can afford single premiums and have high liquid money, it is a pretty good option.