When it comes to buying insurance policies, there are a number of options.
Right from regular policies where you have to service premiums on a regular basis to single premium policies where you pay a premium only once. Of course, with a single premium policy since you don’t have to go through the headache of paying premium regularly, there is neither the fear of the policy lapsing nor an issue of a reduced paid-up value. From an insurance agent's point of view, since the premium has to be collect only once and not followed up, the product is sold aggressively, notes a report in Business Standard today.
If you see the features of a single premium policy, it has a few problems. For instance, the insurance cover is usually insufficient. It does not come with a tax benefit under Section 80 C unless the sum assured by the policy is at least ten times the premium amount. Also, most single premium policies offer a five times as sum assured\ and fail to meet the criteria to qualify for tax benefits. Plus the policy comes with a five-year lock-in period, and if you surrender the policy before three years be prepared to pay a penalty.
So are these single premium policies utterly useless? Not really.
These policies do come with some amount of utility value, says the report. For instance, for people who have irregular income (like consultants or freelancers), these policies work for them. So, you can buy this policy when you have a lump sum amount, get the insurance cover and not worry where the next premium payment amount will come from.
The report also notes that though the premiums of single premium policy is substantial, so are the benefits. The report quotes, Rajeev Kumar, chief actuary of Bharti AXA Life, who said, "The average premium of such products is big and, hence, it is a good option for such people, but will not suit the salaried class as the premiums are high and not all policies are tax-efficient." They also mention than in ideal circumstance you should by a term policy and use the remaining surplus to invest in stocks and Mutual funds. Read the full Business Standard report here.
Firstpost take: We do agree that those who have an irregular income should buy life insurance, if they have financial dependents but we do not recommend a single insurance policy at all. The premium is too expensive, the cover is insufficient and the returns are close to a bank’s savings account. We think that even as a freelancer or consultant, you should still stick to term insurance for life insurance needs. First it’s the cheapest kind of life insurance. Second, buying it online is even cheaper.
Take for instance the example of 30-year old male who has to pay a premium of around Rs 4,500 a year for an insure cover of Rs 50 lakh. And shelling out Rs 4500 a year, or Rs 375 a month should not be an uphill task for anyone. We also believe those who have an irregular income need to seek help for their financial planning needs even more than those who have a regular job. Until you look for a Certified Financial Planner, read this Firstpost story: A financial planning guide for freelancers.