The single premium bond on offer by insurance companies is one of the superior investment options available in the market. While there are a lot of single premium plans from various insurers, we have highlighted the one from HDFC Standard Life stable for its unique investment proposition

HDFC Standard Life’s Single Premium Whole Life Insurance policy has an investment allocation very similar to that of a balanced mutual fund i.e it will invest in both equities and debt securities. But this single premium bond scores over a balanced mutual fund in some ways.

1. Principal erosion: Unlike a mutual fund where the safety of principal is not guaranteed, a single premium bond guarantees the sum assured i.e the principal invested (unless the policy is surrendered). Although the returns are not guaranteed with a single premium instrument, the insurer declares bonus every year depending on its performance. (Last year HDFC Standard Life declared a bonus of 9.25% on the Single Premium Whole Life Insurance policy.)
    

2. Averaging: Averaging is an investment-related term. It means that the investor/fund manager makes additional purchases of a particular stock at regular intervals in a falling market so that the cost of that stock is averaged out. However, for a mutual fund manager it is difficult to avail of the advantages of ‘averaging’ as the fund is constantly facing redemption pressure in a falling market. This is the time when he needs the money to buy stocks at lower levels, but has to make provision to pay investors. So he is never with enough cash to make additional purchases in a falling market and that pulls down the fund’s performance.
    

   But an insurance company is in a position to make purchases in a falling market at will and average out the cost of a particular stock. This is because they have a regular flow of money by way of premiums and maturity of their existing single premium policies is known to them in advance. So they there is rarely a ‘cash-crunch’ if ever. This allows them to post a superior performance.
    

3. Redemption pressure: A mutual fund scheme is always witnessing redemption pressure. This is more acute in a falling market or at the time of an unforeseen event like a terrorist attack. However, unlike a mutual fund an insurance company is never under a redemption pressure as the amount is payable on maturity which is known before hand, unless the policy-holder chooses to surrender his policy.
    

4. Tax benefits: The dividends received from mutual funds are tax free in the hands of investor. However, if there are capital gains on the investment the investor will have to pay capital gains tax. Investments in insurance (including the single premium policy) are eligible for a 20% rebate u/s. 88 of the Income Tax Act. The returns are also totally tax-free under u/s 10 (10D).

So if you have surplus funds and have been looking at mutual funds as an avenue to park money, you may want to refresh your investment perspective. As we have highlighted, the single premium policy has some compelling advantages that a balanced fund manager would find difficult to emulate. Of course, there is a liquidity constraint of 10 years on this money, but if you have money that you don’t need for that period, this is a superior option. We don’t recommend you put all your money in a single premium policy. However, we strongly recommend that you look at it as a more rewarding investment option where you could invest a small portion of your investable surplus.

The main features of Single Premium Whole Life Insurance from HDFC Standard Life:

Eligibility: Minimum 18 years and Maximum 70 years

Minimum Amount: Rs 25,000

Maximum Amount: Rs 500,000 p.a.

Tenure: 10 years

Premium: Single premium of 95% of the sum assured to be paid upfront. E.g If you take a policy of Rs 100,000 the premium will be of Rs 95,000.

Returns: Returns are in the form of bonuses declared every year. Maturity value is calculated on compounding interest on the sum assured and not the premium paid. i.e. Rs 100,000 and not Rs 95,000, which is the actual premium paid.

Withdrawal: The policy can be surrendered anytime after 6 months. However, this would subject to a surrender value.

Claim: Either the holder can take the money on maturity or the policy can be renewed for further 5 years. In case of death, the claim will be calculated on the bonuses declared till that date on the sum assured.

To know more about how insurance can be used as a financial planning tool and how it can be designed to take care of most of the eventualities of life, please register here.

Add Comments