If you want to make your loved ones’ future secure and certain, a life insurance plan is the ideal way. You need to pay a premium in return for the life cover you receive from the insurer. There are many ways to pay the premium. The duration for which you will be paying the premium to keep the plan active is called the premium payment term.
Knowing what the premium payment term is, and the difference it can make to your life insurance plan, can help you make a well-informed decision. With that in mind, here’s a detailed guide on the basics of the premium payment term.
Meaning and Importance of the Premium Payment Term
- Paying the premium keeps the term plan active. It ensures that the protection you have opted for continues for as long as planned. Missing even a single premium may ultimately lead to your policy lapsing. If that occurs, you lose all coverage.
- To make premium payments easier for policyholders, insurers allow them to choose the payment term and even the frequency.
- The premium payment term varies between policyholders, as each one may choose a duration suited to their needs. It also depends on the type of the policy, its duration, and other conditions attached to it.
- The premium payment term can affect the affordability of the life insurance plan. A longer term means you can spread out the premiums over an extended period. Consequently, if you have a significant amount in your hands, a shorter term lets you pay off the premiums faster.
- As a policyholder, you need to be acutely aware of the premium payment term. It determines your obligations towards the insurance provider. It also helps you stay disciplined towards your premium payments in the long run.
Types of Premium Payment Terms
You can choose the premium tenure as per your needs. Here are some options you will come across.
Regular Premium Payment Term
Here, the policy buyer pays the premium throughout the entire policy tenure. So, for instance, let’s assume you have taken a term plan with a tenure of 15 years. Here, the premiums will be spread out over the 15 years, too. Doing so will allow you to continue enjoying the term insurance benefits.
You can pay the premiums over the tenure at the frequency you want. You can pay it monthly, quarterly, half-yearly, and yearly.
Ideal for: Those who have a regular source of income and expect it to continue/ increase gradually in the coming years.
Limited Premium Payment Term
In this option, you can pay the full premium amount within a specified duration from the total policy tenure. For instance, suppose the term plan is for 25 years. Here, you can opt for a limited premium payment term of 5 years only. Once you have paid the full premium for the policy within these 5 years, you will no longer have to make more premium payments. The policy will continue to be active for the rest of the tenure regardless.
Ideal for: Those who may be planning to retire soon, or those who may not have a regular source of income after a specified number of years.
Single Premium Payment Term
With a single premium payment term, you get to pay the full premium in a lump sum. There are no instalments once you make the one-time lump sum payment during the purchase of the plan. For this reason, the one-time premium amount will be quite high. Once paid, you can enjoy the term insurance benefits without worrying about premium payments ever again.
Claiming tax benefits for a single-premium plan can be different from a regular plan. It is best to consult a tax professional for detailed guidance.
Ideal for: Those who want to avoid repeated premium payments; those who may have come across a large amount they want to use wisely.
The above options allow you to curate the premium payment duration as per your preferences. In the long run, this can help ensure a smooth and positive experience with your life insurance policy.
A Guide on Choosing the Right Premium Payment Term
Now you know the various types of premium payment terms. However, before you choose one, let’s look at what to consider.
Age
If you are young, you have a longer period in which you can pay premiums. On the other hand, older individuals may only have a limited duration for the purpose. Hence, consider your age and the time horizon you have before finalising the premium payment term.
Premium Amount
The specifics of your coverage decide what your premium will be. If you have opted for some riders, you will have a higher premium than if you had not. So, you need to look at your premium amount and review what kind of payment term will suit you. If the premium is high, you can opt for a longer premium term. And if it is manageable for you, opting for a shorter term, such as five years, may be a good idea.
You can use a term insurance calculator to get estimates for your premium. This way, you have a clear idea of what the premium will be, which will allow you to choose the right payment term.
Present Income and Expected Future Income
Do you have a regular source of income and are expecting the same in the coming years, too? A regular premium payment term may be a good idea for you. Likewise, a limited term may be ideal if you only have a few years of regular income.
It is advisable to fully understand and review your finances to make a well-informed decision.
Difference Between the Premium Payment Term and the Policy Term
Some may get confused between the policy term and the premium payment term. Here are a few points to distinguish between the two:
Premium Payment Term
| Policy Term
|
It is the duration for which you must pay the premiums at chosen intervals.
| It is the entire duration for which the coverage is active. If the life insured passes away during the policy term, the nominee/s can raise a claim and receive the sum assured.
|
There can be various types of premium payment terms: regular, limited, and single premium payment terms.
| The term can differ from plan to plan. Some life policies are valid for up to 99 years of age (whole life policies). Other plans (term plans) are available for a specified period only, like 10/ 20/ 30 years.
|
Opting for life insurance plans is a great way to secure your loved ones’ future. To ensure that paying its premiums stays a hassle-free experience, one must read up on and choose the right premium payment term.
With various types of payment term options available, you need to thoroughly review your finances to make the right decision. Consulting your financial advisor and life insurance provider is also recommended.
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