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Single Premium Insurance Policies
It is not the tax-saving season, but don't be surprised if you see a deluge of calls and SMSes exhorting you to buy a single premium policy. The sales pitch could follow the time-tested script -`the product offers triple benefits of insurance, investment and tax savings'. Most importantly, it is a one-time investment, which does away with the hassle of paying premiums every year, you'll be told. The launch of single premium traditional insurance plan by public sector giant Life Insurance Corporation of India (LIC) has once brought single premium plans into focus. Should you buy their argument? The answer to that question would depend on a careful assessment of pros and cons of these plans, probable returns and their suitability. This is applicable not only to the product being sold by LIC, but also by other firms.
The obvious advantage is of one-time commitment -once you've paid the premium, you need not worry about policy getting lapsed due to missed premium payments. If you have made a windfall profit from say a sale of property or have earned a bonus, you can look at making the premium payment at one go. "In fact, many employees would be expecting a Diwali bonus by October and this (LIC's) product could be aimed at them. It would also be ideal for those with seasonal or irregular income streams, who may find it difficult to make recurring annual payments.
Moreover, the ceiling on commission paid to agents is 2% in single premium policies, which means that a larger share of your premium will be towards the actual investment. You will not have to pay annual fees like policy administration charges either.
However, since the primary thrust of such single-premium products is investment, rather than insurance, you need to evaluate their return generating capacity, too. Most traditional endowment products invest in secured debt instruments like government securities and offer a return of between 5-7%, with single premium plans faring a shade better. If you are an informed investor, you should consider investing in a tax-free bonds instead and buy a term cover for your protection needs. Therefore, if you are seeking higher returns, you should evaluate other options too, particularly if you have adequate life cover and are looking at single-premium policies only as an investment avenue. After all, the life cover needs to be at least ten times the premium to claim the tax benefit on the entire amount paid.
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