Mr. Sameer Sharma was advised by his financial advisor to invest in a Unit Linked Insurance Policy (ULIP). He understood that such an investment vehicle offered the dual benefit of life cover and return on investment under a single roof. However, at the time of purchase of the policy, Mr. Sharma was in a quandary about which mode of premium payment he should opt for – a single premium or a regular premium payment plan.

Like Mr. Sharma, many are often confused between the two options. In order to make a well-informed decision, it is necessary to understand the meaning of both the choices and evaluate its advantages and disadvantages.

About the single premium payment mode

While purchasing a single premium ULIP policy, you are required to make a one-time lump sum payment. This option is highly suitable for those who have a good amount of investible surplus or have unpredictable or irregular income.

According to the regulations stipulated by the Insurance Regulatory and Development Authority, insurance providers are required to offer a minimum coverage of 125% of the single premium paid. For example, if you have made a single premium payment of INR 1 lakh, the minimum sum assured amount has to be INR 1.25 lakh. You may use a ULIP calculator to determine the premium payable for a desired sum assured amount.

Understanding a regular premium ULIP plan

Under this option, it is necessary to make regular contributions to your policy, say monthly, quarterly, half-yearly, or annually. Regular premium policies work better for those who are looking for long-term investment. It inculcates a sense of disciplined savings.

Single vs regular premium payment plan

You may make a choice between the two options by considering the following six points.

1. Discontinuance fund

As long as you pay your regular policy premiums, you continue to enjoy the policy benefits. In case you stop paying the premium amount due to whatsoever reason, the amount moves into a discontinuance fund. It stays parked here until the lock-in period is complete. The returns offered on your investments in discontinuance funds are very meager, with some insurers offering 3.5%. However, this is not the case with single premium policies. Since premiums are paid just once, you are assured that your funds will not be shifted to discontinuance funds. Therefore, you continue to remain invested.

2. Due date reminder

Unlike a single premium policy, a regular premium plan requires you to remember the due date. Failure to make payment before the due date or during the grace period will result in your funds being shifted to the minimum return generating discontinuance fund. You, therefore, will be unable to enjoy good returns on investment. However, the good news is that most insurance providers send renewal reminders through their automated system.

3. Charges payable

You may note that insurance providers levy certain fees and charges on your policy and hence deduct the same from the premium amount either through cancellation of units or by adjusting the Net Asset Value (NAV). Some of the common charges associated with a ULIP policy include premium allocation charge, funds allocation charge, fund management fee, and policy administration charge. In the case of single premium, these charges are payable just once and hence the cost is comparatively lesser than that charged on regular premium policies.

In the case of regular premium policies, these charges are significantly higher at the beginning of the policy term. However, they reduce as the years go by, and after a certain period, these charges are negated.

4. Rupee cost averaging

Rupee cost averaging is a financial approach, which helps you mitigate risks associated with the market volatility. In a regular premium method, you purchase units at various NAVs thereby averaging the cost of units. This, in turn, smoothens out ups and downs of the market and lowers the impact of short-term market fluctuation on your investments. A drawback of single premium ULIP plan is that it does not provide the rupee cost averaging benefit since units are purchased just once at the time of purchase of the policy.

5. Tax benefits

Besides financial protection and return on investment, a ULIP investment policy extends its benefit to the tax arena as well. Under Section 80C, such a policy reduces your taxable income up to INR 1.5 lakh per financial year in respect to premiums paid towards your plan. Besides, the payout amount is exempted from tax according to Section 10(10D). Additionally, there is no Long Term Capital Gains (LTCG) tax levied on ULIP policies, as opposed to mutual funds.

Both single and regular premium payment plans offer tax benefits. However, the differentiating factor is the frequency at which you may seek tax exemption. Under the single premium policy, you become eligible for tax benefit in just one financial year, i.e. the year of purchase of the policy. A regular premium payment plan, on the other hand, allows you to enjoy tax benefit on numerous occasions. You may receive tax advantages up to INR 1.5 lakh on the premium amount paid every financial year.

6. Unfortunate event of death

In terms of value of money, a regular premium policy makes greater sense. In case of an unfortunate event of death during the policy term, no further premiums need to be paid. In the case of a single premium payment plan, the entire premium amount is already paid. Hence, if you suffer from a sudden death during the policy term, you would have unnecessarily paid for future premiums.

In conclusion, both regular and single ULIP premium payment plans come with their own set of pros and cons. Based on your needs and preference, you may choose the one that fits in with your long-term financial plan.