One payment, low cover

Single-premium Ulips are good for people with erratic income and as gifts for children, but one must opt for a higher sum assured.

Buyers of insurance often struggle with renewal dates. That is, they tend for forget when they have to pay the next premium, as a result of which the policy may lapse. However, more and more private sector insurance companies are introducing single-premium unit-linked insurance plans (Ulips).

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.
 

POLICY BASICS

• 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

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,” says V Srinivasan, CFO, Bharti AXA Life Insurance.

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 Rs 13,104 crore to Rs 23,664.87 crore on a year-on-year basis, as on November 2010. The regular or recurring premium Ulips sold only eight per cent more in the same period, from Rs 25,837 crore to Rs 27,938.40 crore.

The minimum premium in a single-premium plan is usually Rs 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 one-time 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,” says Akshay Mehrotra, head-marketing, Bajaj Allianz Life Insurance.

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 Rs 1 lakh, you will either get a sum assured of Rs 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 Rs 25,000 against a premium of Rs 1 lakh,” says Kartk Jhaveri of Transcend Consulting.

Given the low insurance cover, Supriya Rathi, director, Anand Rathi Insurance Brokers, feels 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 Rs one lakh and have a sum assured of two times the amount, your cover will amount to Rs 2 lakh. The amount of deduction, in this case, will be only Rs 40,000.

“In addition, there is no tax for switches from equity to debt, unlike mutual funds,” says Jhaveri. 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.