Easier to pay regular premiums than a big one-time payment

Published in Mint on 25th March 2014, Written by Kapil Mehta

Should one opt for a single premium insurance product or a multiple premium product?

—Jayesh Gupta
A policy that requires a single premium payment has two advantages and one disadvantage. The first benefit is that you need not worry about renewal dates since no renewal is needed. Second, single premium products are relatively cost effective because commissions are restricted to 2%, insurers earn better investment returns and incur less servicing expenditure.
The disadvantage is that the absolute amount of money to be paid upfront is large.
Consider the example of a 30-year term insurance policy for a 40-year-old for a sum assured of Rs.1 crore. The annual regular premium will be about Rs.23,000, while the single premium will be Rs.3.3 lakh. Most will prefer to pay Rs.23,000 each year even though that is a total outgo of Rs.6.9 lakh over 30 years.
I have a slight preference for regular premiums because the annual payments are affordable and one retains the option of stopping payment in the future.
What do switch and re-direction in unit-linked insurance policies (Ulips) mean?
—Gaurav Jain
The premium in Ulips are used to buy units. The securities underlying these units could be equity, debt or some combination of the two.
Each time you pay a premium, the number of units increases. Switch means that you sell the units already accumulated and replace with others. For example, you may sell your debt units and buy equity units with the money.
On the other hand, re-direction means that you do not sell the accumulated units but use future premiums to buy a different kind of unit. In that sense re-direction is a more gradual shift in investment focus than a switch.
Insurers will give you a certain number of switches and re-directions free of cost.
Several insurers have introduced a lifestage fund where investments are re-directed or switched automatically as and when you age. So, older people will have more debt units and younger policyholders, equity.
I took a unit-linked policy with a private insurer this year and paid Rs.50,000. I cancelled the same within one month of the date of taking the policy due to mis-selling. I got a refund of Rs.49,490. Do I get tax benefit for the Rs.50,000 I had paid, and will I be taxed on the Rs.49,490 that was refunded? How should I deal with this when I file my income-tax return?
—Parth Patel
I would suggest that you do not claim a tax benefit for the premium of Rs.50,000 and treat the Rs.49,490 as a refund that is not taxed. However, if you are very particular about accounts, then the deduction of Rs.510 is eligible for a tax benefit under Section 80C of the Income Tax Act.

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