Single premium life insurance is an insurance plan in which a lump sum amount is deposited up front to guarantee payment to beneficiaries. These insurance plans are a type where a policy holder can pay the premium at one time for the entire tenure of the insurance policy and this is known as Single Premium Life Insurance Policy. As these single premium policies are instantly fully funded, the amount invested in this builds up rapidly, making most of the benefits in case of claimed events like the maturity of the policy. These policies also provide advantages in the event of sudden demise of the policy holder.
In case of premium payment for the life insurance policy, tax deduction can be claimed under section 80C of the Income Tax Act up to Rs.1.5 lakhs every financial year and under section 10(10D), maturity benefits are also tax free. Single Pay Life Insurance Policy (SLIP), being one of the types of life insurance policy, too qualifies for the tax benefits both under section 80C (during the time of investment) and under section 10(10D) for making the maturity proceeds tax-free. Another important point is that since the policy holder will be paying for the premium at a single time only, so they will be eligible for a one-time tax benefit (under section 80C).
Not all SLIP’s will offer the similar tax benefits as presented under a regular premiums paid for life insurance plans. There are certain conditions which should be considered under which the SLIP holders can avail the tax benefits. As per the section 10(10D), for all the life insurance policies issued on or after April 1, 2012, the tax exemption can be availed only if the premium amount does not exceed 10% of the actual capital sum assured in any financial year. This is applicable to all SLIPs. The maturity profits from the SLIPs will be tax-free only if the minimum sum assured during the policy tenure remains a minimum of 10 times the single premium paid. Therefore, if the sum assured on SLIPs is 1.25 times the premium amount, then the maturity profits will be taxable. These single premium policies are occasionally at a drawbacks because their sum assured is low.
If these conditions are not met, i.e. the sum assured is less than 10 times of the premium paid, then the whole maturity proceeds are taxable in the year of receipt, and these earnings will be shown as income while filing for the individuals income tax return. However, in the event of sudden demise of the policy holder, the death claim profits are exempted from all tax deductions regardless of the level of premium paid. The minimum stay period for a single premium policy is usually for 2 years. If the SLIP is surrendered within two years since commencement of the policy , the tax deductions allowed in the past under section 80C will be reflected as income of the policy holder in the year of surrender and applicable taxes will be imposed on it.
Therefore, keeping in mind the above mentioned conditions, it is essential to make sure that an individual buy the proper amount of life cover or sum assured under SLIPs to avail the tax benefits.