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Which premium payment option to choose while buying term insurance

Regular premium payment is the most recommended mode and it involves paying premium monthly, quarterly, half-yearly or yearly.

January 17, 2018 / 12:14 PM IST

Term insurance is gaining in popularity since it provides a huge life cover at an affordable premium. Under a term insurance policy, the insurance company covers the risk against death for the agreed tenure. One of the important factors to consider while buying a term plan is the premium paying mode. Therefore, while opting to buy a term plan, one should be aware that these insurance policies come with different premium payment options. You should make the selection as per your requirement taking the help of an adviser.

“Apart from the periodic premium, there is a single premium, where the premium is paid at one go at the time of policy purchase. Then there is limited pay where you pay for a specific number of years but receive an extended cover. The right premium payment option depends on the payment ability and life stage,” said Navin Chandani, Chief Business Development Officer at BankBazaar.com

Regular Payment Option

Regular premium payment is the most recommended mode and it involves paying premium monthly, quarterly, half-yearly or yearly. The regular premium mode is advised firstly because of the affordability factor.

Santosh Agarwal- Head of Life Insurance, Policybazaar.com said that payment of premium at a single go can result in considerable strain on your pocket. If you are salaried and belong to the middle-income group, it is always advisable to opt for regular premium payment. In addition, it also allows you to discontinue the policy once there are no liabilities and you believe that your dependents are financially independent.  “In contrast to this, Limited pay results in higher premium liability owing to the more financial burden. Single premium payment forces you to pay the whole amount at one go unbiased of the tenure or your requirements,” he said.

(Assuming for a 30-year old non-smoker male buying a term plan for 40 years)
Mode of premium paymentAmount of premiumPayout
Regular (Yearly)12,478100,00,000
Single2,33,137100,00,000
Limited13,076 subject to 35 years payment term100,00,000

Source policybazaar.com

Limited Payment Option

A limited premium payment plan is a plan where you pay the premium for a shorter span of time and enjoy the benefits of an insurance cover for a longer time. The plan is useful for people who like being relieved from the commitment of paying insurance premiums for long periods. It is also opted by people who suddenly witness a sharp rise in their incomes—for instance, someone who is has been posted abroad for a few years or a businessperson who is doing well.

“Limited payment option is also a good one for those who would be retiring before the term plan expires. In this case, there is no expense on the insurance post-retirement as the premiums are already paid. At the same time, the cover extends for a longer period even post-retirement.  That said, the premium that is paid, however, is higher than the premium paid in regular insurance policies,” said Chandani

Single Payments Option

Single premium usually appears to be less expensive compared to regular plans. However, that may not always be the case. The rate of inflation always plays an important role. One should take proper advice from an adviser before investing.

Chandani explained it with an example: Assume a 30 years old pays an annual premium of Rs.10,000 for 30 years for a sum assured of Rs 1 Crore. That comes to effectively Rs 3 Lakhs for 30 years. However, a single premium on the same policy one-time for the same sum assured costs Rs 2.4 Lakhs. While this is less by Rs 60,000 inflation changes the value of the money significantly. So considering that the inflation is at 6%, the single premium of Rs.2.4 lakhs amounts to Rs.13.75 lakhs after inflation in 30 years. It means you are actually paying a lot more for the policy in terms of time value of money. This is something you must consider and make the calculations upfront before you decide which right product is for you.
Navneet Dubey
Tags: #insurance
first published: Jan 17, 2018 12:14 pm