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7 Reasons Why Single Premium Insurance Is A Stupidity

As it is, insurance is one of the favourite "investments" among Indians (despite many serious drawbacks).

On top of it, if there is a product that does away with the hassles of remembering and paying premiums year after year for decades, it becomes all the more desirable. Therefore, whenever people receive annual bonuses or some other lump sum amounts, single premium insurance plans feature among the top investment alternatives.

However, beware!

Given the many shortcomings, your finances would be much better off if you emphatically said a 'No' to single premium insurance policies.

1. Though it is wrong, saving tax is one of the prime motivations of buying insurance. If that be the case, these plans will give tax benefit only for one year. Whereas with regular premium policies one can claim tax breaks for many years, till the premium payments continue.

2. Moreover, only a small portion of the total premium may be eligible for tax deduction. Premium amount is normally a few lakh of rupees. Whereas Sec 80C limit is only Rs.1.50 lakhs, which also covers your provident fund, home loan principal, tuition fees and much more. So the gap remaining may not amount to much... and hence no tax benefit on the balance premium amount. 

3. On one hand people chase dubious deposits just to earn a few extra percentage points. On the other hand, they willingly buy insurance policies that deliver extremely poor returns. I wonder why! Instead, tax-free bonds, EPF and PPF would handsomely beat insurance. In fact, in many instances, even the ordinary banks fixed deposits come out as winner. And not to mention the ever dependable and highly productive debt mutual funds.

4. If the insured person dies before the policy matures, the premiums paid in advance for the future years become a wasteful expenditure. Or if he has insured his home loan through a single premium plan, he stands to lose if he prepays the loan. In short, why pay "now" for the uncertain future years.

5. In absolute terms, the total premium payout in single premium policies is much less than the regular premium ones. So they "appear" to be lot cheaper. This is an absolute fallacy. Suppose, you keep this money in a normal FD. Then your interest earning would be more or less the same as the regular premium amount. So you not only comfortably pay your premiums every year, but also keep your corpus intact with you.

6. You lose the flexibility to prematurely withdraw this money, if any such need arises. And since we are talking of 15-20 years, anything can happen. The surrender charges are prohibitively high when compared to other investments such as tax-free bonds, FDs, debt mutual funds, etc.

7. Lastly, buying single premium plan demands much higher one-time pay out, which may not always be easy and feasible. Instead, if one has to really buy insurance, regular plans put much less burden on the pocket.

Given that single premium policies are hugely popular, it seems that people have never given a serious thought before buying such a plan. They are blind to all its deficiencies and limitations.

Time to end this stupidity!

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