One of the best things about buying term insurance is its multiple premium options. They have low premium rates compared to other types of life insurance policies. One of the term insurance benefits is that you can choose flexible premium payment options as per your budget. Some term policy companies bring some variations by adding different options in premium payments.
Let us talk more about them in detail.
Flexibility to Choose Premium Payment Option
Whether you choose to invest a lump sum amount as premium or pay regularly, term policy allows multiple premium payment options catering to your financial needs. Premium payment facilityare generally categorized into three options:
Limited Pay
Regular premium
Single premium
Let's have a look at each of these premium options.
Limited premium
In a limited pay option of a term policy, the policyholder pays premium only for a specific pre-agreed duration (less than the policy tenure). However, the insured gets full coverage for the entire policy term, irrespective of the premium payment period. This can be better cited with an example:
Let's say, Ram of age 40, buys a term plan for 20 years with a limited premium payment option. He expects to retire at 55 and hence wants to pay off all dues in the next ten years from now. In this case, Ram will be liable for premiums only till the age of 50 years. After ten years, Ram doesn't have to pay the premium; however, the policy coverage will continue for 20 years.
A limited pay option is suitable for:
Those who have a limited career span - say sportspeople, actors, etc.
People with flexible incomes - businessmen or self-employed individuals
Individuals who work on fluctuating earnings - like brokers or agents who work on bonuses and commissions
Those who work in unpredictable working conditions like army personnel
Policyholders who are about to retire in a few years
Regular Pay
A regular premium payment mode for a term policy involves paying the premium regularly - say monthly, quarterly, half-yearly, or annually throughout the policy tenure. Under regular premium mode, the policyholder has to pay the premium for the entire policy period. In such a plan, the premium payment duration and the term of the policy are the same.
For instance, Ram of age 40 buys a term policy with a regular premium option for 20 years. Here, Ram will pay premiums for the entire 20 years and enjoy coverage for 20 years.
Regular premium term policy is suitable for:
Those who have a fixed source of income - salaried individuals
People who want affordable premiums of longer tenure
Individuals who are disciplined in making premium payments
Those who wish to spread their tax benefits across years to gain other investment benefits
Policyholders who have just started working or have many more years to retire
Single premium
A single premium term policy in India is a payment policy where the life insured pays a lumpsum amount to enjoy life cover. A single premium term insurance benefits the policyholder from eliminating the need for making periodic premium payments. Pay one time and sit back and enjoy your life.
Being a one-time payment plan, you do not have to worry about the policy getting lapsed due to non-payment of premiums. Buying term loans with a single premium payment option provide tax benefits as well. The premium paid is eligible for tax deduction under Section 80C of the Income Tax Act, and the sum assured is exempt under Section 10 (10D) of the same law.
Limited Vs. Regular Pay Premium Payment
Limited premium | Regular premium | |
Premium period | Shorter period | Longer period that cover the entire policy tenure |
Coverage | Comprehensive coverage irrespective of limited premium time | Full coverage for the entire policy tenure |
Chance of policy lapse | Lesser chance due to shorter disbursement time | Higher chance due to default in the premium payment |
Complexity | No complexity of the multi-year premium payment | Comparatively high complexity due to flexible payment of monthly, half-yearly, or annually |
Financial burden | Centered to a specific period | Spread across the entire term policy tenure |
Payment after retirement | Payments end within a stipulated time and don't extend beyond retirement. | Payments can continue even after retirement. |
Choosing between the Two Payment Options
Choosing between the two premium payment options is solely subjected to your needs. What might be perfect for an individual might not be acceptable for another individual. The selection of premium payment depends on the policyholder's age, type of income, tax benefits, etc.
If you have a few years left to retire and do not want to take any additional burden, you can opt for a limited premium payment option. On the other hand, if you have just started earning and has plenty of years left to retire, you can go for a regular premium payment option.
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