While buying an insurance plan, you might have come across something called the "premium paying term". Have you ever wondered what that term stands for? If you have, then that is exactly what we will be looking into here. Let us begin by getting to know how a term insurance plan works.
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.
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.