What is the Premium Paying Term in Term Insurance?
The premium paying term's meaning is the period during which you’ll pay premiums to keep your term insurance policy active. This term can range from just a few years to the entire policy duration.
Let’s understand this with an example. Say you’ve taken a plan with a 30-year life cover. If you choose to pay premiums for the full 30 years, that’s a regular premium payment plan. But if you choose to pay for only 10 years, then it is your limited premium paying term. In short, the premium paying term is simply how long you make premium payments towards your policy.
How does term insurance work?
A term insurance plan is essentially a type of a life insurance plan, wherein the insurer provides you a life cover for a specific tenure of your choice in return for periodic payments made known as premiums. In the event of your unfortunate demise during the tenure of the plan, the insurer disburses a certain sum of money, also known as a death benefit, to your nominees/beneficiaries. Since a term insurance plan essentially offers a life cover, it is also sometimes referred to as term life insurance. The premiums of a term insurance plan are lower when compared to other traditional life insurance products because term insurance does not have any investment component.
What is the premium paying term?
Now that you know how term life insurance works, let us delve into the concept of premium paying term.
Technically, the entire duration for which you are obligated to pay premiums to the insurer is known as the premium paying term. For instance, let us say that you opt for a term insurance plan for which you are required to pay a monthly premium of Rs. 2,500 for 60 months. Here, the premium paying term is 5 years and premium payment frequency is monthly.
How is the premium paying term different from the policy term?
Most people tend to think that the premium paying term and the policy term are the same. However, the reality is that both these terms are quite different from each other. Let us take a quick look at how they differ.
As you have already seen above, the premium paying term is the duration for which you are required to pay premiums to the insurer. The policy term, on the other hand, is the entire duration for which you get to enjoy the benefits of a term life insurance plan. For instance, let us assume that you opt for a term insurance plan that offers you a life cover for a period of 30 years. Here, the 30-year period is the policy term. Usually, in the case of a majority of term life insurance plans, the premium paying term is often the same as the policy term. However, that is not always the case. Sometimes, the premium paying term is shorter than the policy term. Let us discuss more about this concept in the following paragraphs.
Types of term insurance plans based on the premium payment term
Depending on the premium payment term, insurers classify term life insurance into two types.
Regular term insurance plans
In a regular term insurance plan, the policy tenure and the premium payment term are of the same length. For instance, let us say that you opt for a plan where you are required to pay Rs. 10,000 per year for 20 years. The plan also offers you a life cover for a period of 20 years. Here, the policy term is 20 years and the premium payment term is 20 years. Such plans are what insurers refer to as regular term insurance plans.
Limited premium payment term insurance plans
In a limited premium payment term insurance plan, the premium payment term is always lower than the policy tenure. This effectively means that you will not have to pay premiums for the entire duration of the policy. However, you will still enjoy the benefits of the cover until the end of the policy’s tenure.
Let us take up an example to better understand the concept of limited premium payment term insurance plans -
Assume that you opt for a term life insurance plan with a tenure of 20 years. However, you are required to pay a premium of Rs. 20,000 per year only for a period of 10 years instead of for the full tenure of 20 years. Here, the policy term is 20 years and the premium paying term is shorter, at just 10 years. Such plans are what insurers refer to as limited premium payment term insurance plans.
Benefits of limited premium payment term insurance plans
Now, let us look at some of the advantages that limited premium payment term insurance plans have over regular payment term insurance plans -
- With these plans, you get to enjoy a much shorter premium payment period, thereby reducing your financial burden.
- They limit your chances of missing a premium payment and the risk of policy lapse.
- These plans are the preferred option for self-employed individuals and individuals who do not wish to commit to longer premium payment obligations.
- Term insurance premiums have to be paid for a specific duration while the coverage under the policy extends for a longer duration.
How to Choose the Right Premium Paying Term?
Choosing the right premium paying term depends on your current financial capacity and life goals . Consider how long you can comfortably sustain premium payments, how the premiums align with your monthly budget etc.
Policyholder’s Age
Your age plays a big role in selecting the premium payment term. If you're young, consider choosing a regular premium payment option, which spreads the cost over a longer time. This keeps premiums low and manageable. If you’re closer to retirement, a limited premium payment plan might suit you better. It lets you complete payments in a decided time and enjoy cover even when you're no longer earning.
Policyholder’s Income
Your current income affects how much you can afford to pay regularly. If you have a stable salary and low financial liabilities, you can choose a shorter paying term with slightly higher premiums. On the other hand, if you're managing EMIs or supporting dependents, a longer term with smaller premium payments might be a safer choice.
Expected Growth in Future Income
If you expect your income to rise steadily in the future, you can consider a shorter premium paying term. Higher premiums may feel tight now, but as your earnings increase, it may be easier to manage the premium payments. The benefit is that you’re done with payments early, then your policy keeps working for you till the policy term that is chosen.
Methods of Paying Premiums in Term Life Insurance
Insurers usually offer flexible payment modes so you can pick what suits your income cycle. Here are the premium payment options:
Annual Premium Payment
You make one lump sum premium payment each year, and you’re sorted till the next year. With many insurance companies offering certain discount on annual payments, it can also be slightly more cost-effective overall.
Half Yearly Premium Payment
Half Yearly mode splits your premium into two equal installments every year. This eases the strain of paying the full annual amount at once .
Quarterly Premium Payment
With quarterly payments, you pay your premium four times a year. It suits those who don't want to pay the premium every single month but still look for smaller instalments.
Monthly Premium Payment
Monthly premium payment term spreads the cost across 12 months, making each instalment smaller and easier to plan around. It's especially helpful if you're juggling EMIs or other monthly expenses. Just remember that monthly payments can mean slightly higher total premiums over the policy term.
Lump Sum Payment
Term life insurance plans allow you to pay the premium for the policy in one lump sum upfront. This option makes sense if you have extra money at hand and want to avoid having to make future premium payments.
How is the premium paying term different from the policy term?
Most people tend to think that the premium paying term and the policy term are the same. However, the reality is that both these terms are quite different from each other. Let us take a quick look at how they differ.
As you have already seen above, the premium paying term is the duration for which you are required to pay premiums to the insurer. The policy term, on the other hand, is the entire duration for which you get to enjoy the benefits of a term life insurance plan. For instance, let us assume that you opt for a term insurance plan that offers you a life cover for a period of 30 years. Here, the 30-year period is the policy term. Usually, in the case of a majority of term life insurance plans, the premium paying term is often the same as the policy term. However, that is not always the case. Sometimes, the premium paying term is shorter than the policy term. Let us discuss more about this concept in the following paragraphs.
Conclusion
The premium paying term is something that you should always consider whenever you are buying a term life insurance product. Limited premium payment plans are preferred option for individuals and for people nearing their retirement since they allow you to reap the benefits of the policy even after your earning years are long gone. Additionally, the increased utilization of term insurance tax benefits is another reason for you to opt for these plans.
FAQs
Can You Modify Your Premium Paying Term in a Term Life Insurance Policy?
No, once your premium paying term is chosen and the term insurance policy is issued, it usually cannot be changed. Choose carefully based on income, age, long-term plans and other factors.
Are there penalties for late premium payments in India?
Insurers do give you a grace period of 30 days with the payment mode of quarterly, half-yearly or yearly and 15 days for monthly premium payment mode after the due date. If you miss making payments during this grace period as well, the policy may lapse.
How can you calculate your term insurance premium amount?
Use the term insurance premium calculator. Inputs include your age, gender, income, cover amount, tenure, chosen premium paying term, etc.
