Single-premium Ulips are good for people with erratic income and as gifts for children, but one must opt for a higher sum assured
Of course, the other reason for this is the strict guidelines introduced by the Insurance Regulatory and Development Authority (Irda) on Ulips, which have made this product unattractive from a distributor's perspective.
Single-premium products ensure the distributor earns his income by making a one-time sale. Similarly, for buyers it means lesser headache. Customers are more comfortable with single-payment policies which have no future commitments. This also saves the hassle of the policy lapsing.
The latest numbers reflect this growing interest in the product. Around 80.59 per cent of Ulip sales now come from single-premium policies. The sales grew from `13,104 crore to 23,664.87 crore on a yearon-year basis, as on November 2010. The regular or recurring premium Ulips sold only eight per cent more in the same period, from `25,837 crore to 27,938.40 crore. The minimum premium in a single-premium plan is usually `10,000.
While the idea of one-time payment seems quite tempting, financial advisors say you should take into account future insurance needs before taking the decision.
Besides the lure of a onetime payment, the other big positive about a single-premium policy is the lower charges compared with regular premium Ulips, at least at the entry stage. The premium allocation charge (PAC) is less than five per cent as compared to the 5-7 per cent charge for regular premium Ulips.
But, these are not one-time costs, he adds. All the charges like PAC, policy administration and fund management charges will continue to be deducted from the accumulated fund value from the second year onwards.
Another advantage of buying this product is the low mortality rate charged by insurers. But, the mortality charge is deducted every month, depending on the age of the individual, by cancelling the units that have accumulated in the investment fund.
However, the big problem with single-premium products is that the insurance component is much lower. These plans offer a sum assured of either 125 per cent or five times the premium. For a premium of `1 lakh, you will either get a sum assured of `1.25 lakh.
Financial planners' main grouse comes from this factor. It's not worth investing in such products for an extra amount of just `25,000 against a premium of `1lakh.
Given the low insurance cove, these policies cannot be your core insurance solution.
According to insurance agents, many are buying these products to save on their tax liability.
Under Section 80 C, you will be entitled to the benefit on the premium amount only up to 20 per cent of the sum assured. Therefore, if you are paying a single premium of say `one lakh and have a sum assured of two times the amount, your cover will amount to `2lakh. The amount of deduction, in this case, will be only `40,000.
In addition, there is no tax for switches from equity to debt, unlike mutual funds. However, this should not matter for a long-term investor, he quickly adds.
Financial experts feel this product is best suited for people with an unpredictable, seasonal or irregular income flow. But even those people need to purchase products with a higher insurance cover. Financial planners don't favour the product as one's core insurance instrument.
But one could use it as an add-on life cover. These products could also be good gifts for children or grandchildren.
The minimum premium is `10,000
Premium allocation charge in the first year is less than five per cent
It is deducted from accumulated corpus in later years
Mortality rates lower
Suitable as add-on, gifts and for people with erratic incomes