The premium payable for life insurance is a critical factor governing purchase decisions. It needs to fit into your budget so that you can continue the payment and keep your policy in force. Term insurance premiums are typically more economical than other life insurance products. However, the mode of premium payment contributes to affordability to a significant extent. Hence, you need to understand the available alternatives to select the payment option best suited to your resources.
Types of Premium Payment Options in Term Insurance
Term insurance offers the following premium payment modes:
- Regular pay – premium payment term is the same as the policy term
- Limited pay – duration for paying premiums is less than life cover duration
- Single pay – one-time lump sum payment
You need to make a choice when you buy the policy. Here’s a detailed description of each payment option.
What is regular pay term insurance?
In this option, you need to pay the premiums periodically for the entire policy period. With regular pay, you can choose to pay your premiums yearly, half-yearly or monthly.
What is limited pay term insurance?
In the limited pay option, you make recurring payments but for a pre-specified limited period. This duration is lesser than the policy term. But the life cover remains intact throughout the tenure.
Hence, you can pay off your premiums when you have the necessary funds. Here the premium instalments are higher than that for regular pay term insurance.
What is single pay term insurance?
With this option, you can pay your entire premium amount in one go when you buy the plan. The life cover remains valid throughout the policy tenure. Thus, you need not worry about arranging funds at every due date or your policy lapses due to non-payment. Also, insurers often offer attractive discounts on single payment term insurance premiums.
Key differences between term insurance limited pay vs. regular pay
|Feature||Regular pay term insurance||Limited pay term insurance|
|Premium payment duration||Longer, lasting throughout the policy period.||Pre-defined period, shorter than the policy term.|
|Coverage||Full coverage for the entire policy term, but buying extended coverage beyond retirement age can be financially challenging.||Extended coverage irrespective of limited payment time, allows longer coverage post-retirement.|
|Flexibility||No loss if the policy is surrendered abruptly as the policyholder can get an adjusted value.||No benefit is available upon policy termination due to non-payment.|
|Financial burden||Load is evenly spread out throughout the policy duration.||Entire load is concentrated on a shorter span.|
|Premium cost||Payment amounts are higher.||Premium amounts are smaller.|
Difference between policy term and premium paying term
Policy term: It refers to the period for which the term insurance remains active. After the end of the policy term, the policy is considered to be invalid/void or matured. The policy term is specified by the insurance provider at the time of the purchase of the policy.
Premium payment term: It refers to the period for which you are required to pay the premiums for your policy. The premium paying term for a term plan can be equal to or lower than the policy term. For instance, you can purchase a term insurance that will provide you with life cover for a period of 40 years. The policy term will be 40 years. You can choose to pay off your premiums over the first 20 years and then, enjoy the policy coverage for the remaining 20 years without paying any premiums. In this case, your premium paying term would be 20 years.
How to choose the right payment option?
The choice between term insurance limited pay vs regular pay depends on your payment ability and life stage.
Choose the limited pay plan if you are unsure about paying premiums long into the future. This option is suitable for individuals:
- Having short career spans like sportspersons
- Working in unpredictable environments like the army
- Business owners or professionals with fluctuating income
- Nearing retirement age but want coverage up to a higher age bracket
In such scenarios, you can pay off the premiums during your active work life.
People with a fixed income source might find the periodic, premiums easier to service. Hence, if you are a salaried employee, this mode can be more viable for you.
Also, if you are young and looking for coverage only until your retirement age, this option can reduce your total premium cost. You can also enjoy the tax* benefits under Section 80C throughout the policy period.
If you have surplus money available, you can create an asset for your family through this plan.
The policy term and premium paying term can be chosen, depending on your needs and convenience. For instance, if you’re buying a term plan for coverage till your retirement age, you can opt for the regular premium payment term. However, if you’re opting for a term policy with an even longer coverage, you can opt for the limited premium payment term.