Deferment Period in Insurance
What is the deferment period in insurance?
The deferment period in insurance refers to the time gap between the last premium payment and the start of policy benefits. In simple terms, it is a delay in when you begin receiving the benefits, while the policy remains active.
This term is commonly used in annuity plans, child insurance plans and other insurance plans that offer an income benefit. These benefits are not provided immediately but usually start after a specific period. That delayed phase is known as the deferment period in life insurance.
It is important to note that the deferment period is different from the waiting period. During a waiting period, you cannot make any claims. However, during a deferment period, you can raise a claim in the case of an unfortunate event. Still, the planned benefits or payouts will not commence until the deferment period has ended.
Why is the deferment period important in an insurance policy?
Below are some reasons why the deferment period is important in an insurance plan:
Importance for policyholders
The deferment period works in the policyholder's favour, especially in plans that accumulate value or offer income payouts. Since the benefits are delayed, they get more time to grow. For example, in an annuity plan, deferring payouts for five years could result in higher monthly income later due to the compounding effect.
It also gives policyholders a chance to plan ahead. If you know your policy will begin paying out the benefits five years from now, you can plan ahead and align the plan with future financial needs, such as retirement.
Importance for insurance companies
The deferment period is also important for insurers as it offers them more time to manage and invest the policyholder's funds. It allows the insurance company to earn returns on the invested capital before it starts giving out payouts.
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