Friday, March 8, 2013

How fit are single premium plans to address your needs?

Tax saving season is in full swing and insurance companies are trying their best to corner as much business as they can. In the last few months life insurers like HDFC Life, ICICI Prudential Life and Edelweiss Tokio Life have launched pension and regular unit-linked insurance policies ( Ulips) offering both regular and single premium options.

Last week, the biggest of them all — Life Insurance Corporation of India (LIC) — launched Jeevan Sugam, a traditional single premium plan. In 2008-09, thousands of investors bought the public sector behemoth's single premium plan Jeevan Aastha, which became a runaway success. LIC would certainly be hoping for an encore with Jeevan Sugam. That means you can expect a flood of promotional calls, SMSes and emails. Your insurance agent or bank will also try to promote other single premium plans, be it traditional or Ulip, heavily in the coming days.

The sales pitch may remain the same: here is the latest product in the market, which gives attractive returns, insurance cover plus tax benefits. The triple benefit of "insurance, investment & tax-saving" is an irresistible combination for many investors. However, you should have a close look of these insurance products this March. The insurance sales person will tell you that a single premium plan will help you to secure your family's financial interests at one go. But that is hardly the case.

For one, you should have a really deep pocket to get sufficient insurance cover for your family through a single premium plan. "For people with fluctuating income, this is possibly one of the best instruments available today. Single premium is simply a mode of payment and comes handy for those with shorter career spans as well," says certified financial planner Harshvardhan Roongta, CEO, Roongta Securities. "Typically, people who have made some windfall gains or are sitting on huge investible surplus prefer single premium plans," says Sanjay Tiwari, vice-president, strategy and product at HDFC Life.

"These plans are suitable for those who do not wish to make recurring payments or fear lapsation," he adds. Simply put, you should consider purchasing a single premium product only if you fall into this category. That is, you have a sizable amount via bonus, proceeds from sale of property, and so on.


If you are buying a single premium product with the only aim of reducing the tax outgo, you better take a look at the insurance cover it offers. This is because a single premium product qualifies for deductions of up to Rs1 lakh under Section 80 C only if the sum assured is at least 10 times the annual premium. Else, such plans will be eligible for deduction only up to 20% of the sum assured.

That means, if your single premium is Rs50,000 and the sum assured Rs1 lakh, only Rs20,000 will be allowed as deduction. While most insurers will ensure that their plans meet this criterion, you must ascertain the premium-to-sum-assured ratio yourself. Moreover, investment experts argue that one shouldn't make any investment decision purely on the basis of tax benefits.

"Most single premium plans are essentially investment products with bare minimum insurance cover to meet the regulatory requirements as well as to avail tax benefits. The key disadvantages include higher expenses, lock-in period and high surrender charges, as well as lack of clarity on investment avenues," says Raghvendra Nath, CEO, LadderUp Wealth Management.

"You also need to take into account the opportunity cost. For instance, say you have an investible surplus ofRs1 lakh in hand. Before directing it to a single premium plan, you need to figure out whether your resources would be better utilised if you buy a policy with an annual premium ofRs10,000 and investing the balanceRs90,000 in other avenues. The opportunity cost of money makes it less attractive than a regular premium plan," says Narang. Besides, there are other options that can offer comparable benefits.

"Tax-free bonds with the similar tenures of 10-15 years can yield a 7.5% return today. When Jeevan Aastha was launched in 2008, there were no 10-year papers available in the market, but things are different today. We maintain that it is better to go for tax-free bonds as they are superior in terms of returns as well as liquidity," says Roongta.

Before zeroing in on a single premium plan, compare the guaranteed return promised by the product with various banks' fixed deposit rates. Most endowment plans, including single premium ones, fetch a return of 5-7% per annum, in addition to any loyalty benefits, while single premium Ulips' returns will be linked to the market performance. If you are scouting for avenue to simply park your lump-sum, you can also consider more liquid options like diversified mutual funds and bluechip stocks before buying a single premium plan.

"Only investors with a risk-averse mindset who can sacrifice liquidity for the policy duration and who do not have enough understanding of capital markets should go with these products," says Nath. Finally, if you are convinced that a single premium plan is indeed a good fit in your portfolio, you can get down to assessing the offerings of such products from various insurers.

However, do not make the mistake of comparing Ulips with traditional plans. However, remember that financial experts always recommend planning for investment and insurance needs separately. So, ensure that your goal and affordability is also taken into consideration along with the tax breaks. 
Source : ET

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