Single premium policies not for salaried

These insurance products are expensive and meant for those with irregular incomes

After being pestered for weeks by an insurance agent to buy a single premium insurance product, Shashank Thakkar approached his financial planner. And the answer was simple, "Don't buy a single premium plan."

For a salaried person like Thakkar, it makes little sense to purchase such a plan. Such plans are, typically, meant for people with irregular incomes. For instance, a 40-year-old person would pay a lump-sum amount of Rs 3 lakh for a Rs 50 lakh cover for 18 years. Whereas, if the person chose a regular premium, he would have to shell out between Rs 12,000 and 15,000 annually, and would still pay far less than in a single-pay product.

Hence, it's always better to seek professional advice than fall into such traps, which could ruin your future financial goals. In fact, such plans are mostly sold in the southern part of India and are purchased by people who are working abroad.

Suresh Sadagopan who runs Ladder 7 financial advisory services, advises, "If the person choses a single-premium product, and if the buyer died during the term, his premium paid for the rest of the term goes waste. Hence, don't choose the product just because you want to get rid of paying that premium every year. One should buy what suits one's income style, maintaining investment discipline."

Financial planners also caution on single-pay products, because they usually offer lower premium than the regular ones. So, this can be a problem if you are looking to save tax, although the entire amount paid towards its premium can be claimed under Section 80C as payment towards insurance premiums. But for last-minute tax savers, this may be the perfect option.

Hence, single-premium products may work for some under certain circumstances. Paying regular premiums annually is considered a big challenge as Indians have a different spending style. One's policy may lapse due to lack of funds to pay the premium on time or missing the due date of premium payments.

With higher chances of such plans being mis-sold, it's best to weigh the pros and cons before buying them. Hence, it's a good idea to buy an appropriate product that one can afford.

The slowdown in the segment is because the sector regulatory, Insurance Regulatory and Development Authority (Irda), has shown concern over these products and has asked insurers to focus more on regular-premium products."We don't really encourage this product, as there is no recurring revenue benefit to the customer. We believe this trend is going to continue for a few more months because regular premiums have gained momentum," says A K Sridhar, joint president, Indiafirst Life Insurance Company.

According to Irda, private life insurance companies have shown a dip of close to 16 per cent in single premium collections for the month of January over December 2011. This was followed by Life Insurance Corporation, which alone posted an 18 per cent dip in the same space. Whereas, insurers showed an overall increase of close to 40 per cent in this number in December, compared to November 2011.