Insurance premiums can be paid in one go or at regular intervals. In this article, we talk about the pros and cons of both and help you make a decision.
When you buy a term plan or a mortgage plan, you are given the option of paying the premium in one go. You can also choose to pay the premium over a period of time, at regular intervals. There is no clear answer to what is better. You have to analyse the situation and your own financial health to understand whether a single premium is good for you or not. Take a look at the points mentioned below to see which option is best suited for you.
Cost factor
As we all know, a single premium is a large amount. You have to assess your finances and see whether or not you can afford to pay such a high amount in one go. If you have the resources and want to clear off your dues up front, go ahead and do so. If however, you feel the amount is burdensome, opt for the regular premiums and break the amount into smaller parts.
Income flow
If you are employed in a field where you receive lump sum amounts of money from time to time (sales bonuses, incentives, etc), you could pay your premium in one go with a large earning you get. However, if you depend on a regular, monthly salary, opt for the regular premiums. You can then manage your money in a more organised manner and set aside an amount each month for the premiums. It becomes more manageable this way.
Death benefit
A term plan or a mortgage plan ends when you die. Your nominee receives the death benefit. Let us assume Ram has taken a term plan of Rs 1 crore for 25 years. His yearly premium is Rs 10,000. He pays the premium for the first three years and then dies in a road accident. His family gets the lump sum death benefit of Rs 1 crore against a premium of Rs 30,000 that has been paid. Had he opted for a single premium, he would have had to pay Rs 4 lakhs as premium but the death benefit received would have remained the same.
Limited investment options
There is no return component of a term plan. The money you pay is fixed in a fund that your nominee receives if you die. If you outlive the policy period, you don’t get the fund back. Pay the single premium only if you are confident of having enough money left over (after paying the premium) to make other investments. Else, make an investment that offers returns with a larger sum and use smaller sums to pay the regular premiums.
Tax relief
This is a very straightforward point to understand. When you pay a single premium, you get the tax benefit only once. Obviously, it is a large benefit. For the regular premiums, you get regular, albeit lower, tax benefits. If you rely on your insurance premiums alone for tax benefits, you may want to go for a regular premium for regular tax reliefs. If there are other tax saving tools in your portfolio, you could opt for a single premium option.
The bottom line
There are pros and cons of both the premium paying options. When you buy a term plan or mortgage plan, you have to be very careful in choosing the option that suits you the best. If you don’t make the correct decision, you may face many problems in maintaining the plan and also while making a claim. So analyse your situation and opt for the right premium paying term.