A unit-linked insurance plan (ULIP) is the go-to choice for several individuals regarding life insurance. It has a unique structure that comprises a combination of life insurance and investment. You must pay a premium like life insurance after opting for a ULIP. However, it is allocated differently. Your premium is partly used to provide you with a life cover and is somewhat invested in funds of your choice. You can pay the premiums in two ways, either with a single or regular premium. The single tip is when you spend a lump sum for your ULIP. At the same time, a standard premium option is when you have to pay regular premiums.
You can choose your premium plan while buying a ULIP, whether a single or a regular one. A single program offers you the policy with a single installment. A typical scenario is when you have to make recurring payments. You can choose the frequency of your expenses, be it monthly, half-yearly, or annually. If you are contemplating the type of premium you should select for your ULIP plan, here are some factors that will help you differentiate between the two:
Convenience
A single premium ULIP is much more convenient than a regular premium plan as you have to pay once for it and not worry about future payments. Once the premium amount is made in a single premium plan, the policyholder does not have to worry about fees or arranging money for premiums. For a regular premium plan, ensure you have sufficient funds to pay premiums on time. You can also choose automated systems, but ensure you pay premiums on time. This is because missing tips may lead to your policy lapsing altogether.
ULIP is a life insurance policy along with a long-term investment plan. When you buy a single premium policy through a ULIP, your premium will likely be high since it is a one-time amount. When you choose a regular premium plan, the tips are low since you have to pay in parts rather than one enormous sum. You can use a ULIP plan calculator to calculate your premium and choose your sum assured accordingly.
Maximizing returns
In a regular ULIP, a shortage of funds at any point during the policy may lead to its discontinuation. The discontinuation of funds will directly impact the returns. A single-premium ULIP does have the maximum potential return, as there are no chances of funds being discontinued.
Affordability
Your financial planning is impacted when you must pay ULIP premiums. If you choose to pay a lump sum amount at one time, it might take a toll on your finances for that specific year. A single premium of sufficient financial cover will be expensive. However, the tips may not feel so hefty if you pay regular premiums for the same amount. You will get the same ULIP benefits in both ways.
Benefits on taxation
Under Section 80C of the Indian Income Tax Act, the policyholder can avail of the tax benefit of up to ₹1,50,000 on the annual premium paid for a life insurance policy. Section 80C is the same for both single and regular premium policies. When you spend a bonus, you can specifically avail of a deduction for that financial year. Hence, you can claim the deduction under Section 80C only once in a single premium policy. With a regular premium plan, you pay the premiums every year. You can use a ULIP calculator to estimate your premium amount and its tax implications.
Risk associated
ULIP is life insurance and investment in a single plan. A ULIP benefits the policyholder, who can switch their fund allocation anytime. This allows them to shift their funds from debt to equity based on their risk appetite. When you are investing in any financial instrument, your risk appetite is affected. When you pay a single premium of a large sum, you will likely face extreme market conditions compared to regular tips. The reason is that rupee cost averaging is considered a regular payment of dividends; Rupee cost averaging allows you to buy more units of your funds when the market is low and fewer units when the demand is high to maximize your profits.
