Should you opt for single or regular premium payments for insurance?

Deepak is 30 and getting married soon. He wants to buy life insurance, and has opted for a 15-year plan with an annual premium of Rs 20,000. The sum assured is Rs 75 lakh. Effectively he pays Rs 3 lakh over 15 years. His friend Sumeet has opted for a single premium option for the same policy, and has to pay only Rs 2.5 lakh as a one-time payment for the same sum assured.

Sumeet boasts of saving Rs 50,000 and tries to convince Deepak to switch to single premium. Deepak is also tempted, considering the convenience. Should he opt for a single or regular premium policy? Which one makes more sense for him?

While one-time payment is convenient, Deepak must not ignore the time value of money. Sumeet has not taken the inflation factor into account in his calculations. Assuming an annual inflation rate of 6%, the single premium of Rs 2.5 lakh would actually amount to Rs 6 lakh in 15 years. This means that Sumeet will actually pay far more in terms ‘time value of money’. Moreover, as inflation rises over the 15-year period, the annual premiums will actually appear to become cheaper.

The other key factor for Deepak to consider is the affordability. How easily can he manage a lump sum outflow of Rs 2.5 lakh? As a salaried individual, given that he can spread the payment out over many years, the premiums seem more affordable, unless he has spare funds lying around in his bank account or is expecting an inflow that he can allocate towards life insurance payments.

Even if that were the case, he might be better off investing it. Perhaps if he were a businessman with an irregular cash flow, single premium policies would have made more sense. Further, Deepak must evaluate whether both policies offer similar benefits in terms of riders, options and sum assured.

It is quite clear that affordability of single premium policies is the key factor to consider. As a financial decision, it is imperative that Deepak takes into account the ‘time value of money’, as well as the inflation factor while making the choice. Such a decision cannot be made based on convenience alone.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)