Life insurance plans offer many unique features which can make the plan more convenient for you but offers a trade-off as well. Limited and regular payment options under the premium payment term. We should first look at the premium payment term before we get into the different premium payment options.
Premium Payment Term or PPT
Premium Payment Term in a life insurance policy is the total number of years you will pay the premiums. It can be same or less than the total policy term. For example, if you want to buy a term life insurance for 30 years, your premium payment term can be 30 years or less. Here 30 years is the policy term for the term insurance plan.
Most life insurance policies would offer three different premium payment terms:
Regular Premium Payment Term
In this option, your premiums payment term is equal to the policy term. Since you need to pay the premiums in advance, you will pay the premiums for one policy year at a time. Each premium out-flow is lowest under this option.
Limited Pay Options
Limited premium payment term refers to a premium payment term which is less than the policy term but does not include the single premium option. Every life insurance plan may give you a few PPT options under this feature. For example, 5, 10 or 15 years.
The best term and life insurance plans also let you pay the premiums till retirement age, which is quite beneficial as you can extend the premium payment but still keep it within your working years, while the policy can extend into your retirement.
The shorter your premium payment term the higher each premium will be, however there are several benefits of limited premium payment term over others. Thus, you pay till retirement option but the cover continues several years after retirement.
Single premium payment option may be available with select few life insurance plans. Single premium payment means you pay the premium for the entire policy tenure in one instalment at the commencement of the policy.
Why Don’t the Premiums Add Up?
When you switch from regular pay option to limited or single payment option, you will find that the premiums total less than the regular pay option. Meaning, your total outflow in the limited pay option will be less than regular pay and even lower under single pay option.
This is because a discount rate applies to all advance payments to the insurer. The rate depends on the prevailing long-term interest in the market and has been ranging from 4% to 8% p.a. in the past.
Which Premium Payment Option is the Best?
As mentioned earlier that you may want to continue your life cover past your retirement. This is useful in case you have loans, dependent family members to look after in the post-retirement period. In such case pay till retirement option is the best.
However, if you are self-employed and have a cyclical income, you will be better off with limited or even single premium life covers. Even in case of investment life plans like ULIPs, you can select limited pay option so that your payment obligation is for a short period only.
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Though, you can continue investing any amount in the ULIP plan throughout the policy tenure. After your limited premium payment term is over, you can invest in the plan as per your convenience.
Just, ensure that your investment in any financial year does not exceed 10% of the base life cover in any life insurance plan. If it does you may end up losing the tax benefits on the policy under both section 80C for invested premium and section 10(10D) for maturity value.
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