Life insurance is a long-term investment. As a policyholder, you must pay the premium regularly on or before the due date to keep your policy active. When you purchase a new life insurance policy, you may compare the features and the premium amount of the different plans, right? While these factors are critical, you must also choose the right premium payment option. It is essential to be aware of the several premium payment choices different life insurance policies offer.
What is a Premium Payment Term (PPT)?
While there are different types of life insurance, like whole life insurance, endowment life insurance, term plan with return of premium, etc., there are also various premium payment term options. As the term suggests, the premium payment term is the duration for which you pay the premium(s) for your life insurance. It may be the same length as the policy term or shorter.
Typically, you can choose from three premium payment options when buying life insurance — Regular Pay, Limited Pay, and Single Pay.
Regular Premium Payment
Most insurance experts recommend that insurance buyers choose the regular premium payment mode, which involves paying the premium periodically. This could be monthly, quarterly, or annually. Typically, with a regular premium payment mode, the premium becomes quite affordable, as you get to pay the amount over the years.
If you are a salaried employee, choosing a life insurance policy that allows you to select a regular premium payment mode is best advised. You can easily manage the premium payment after meeting your everyday household expenses as the amount is small and affordable.
Limited Premium Payment
A limited premium life insurance policy is where you pay the premium for a shorter period and enjoy its benefits for a longer term. You can choose a limited premium payment plan if you don’t want to commit to paying the premium for an extended period.
You may also choose this type of plan if you have surplus cash and want to use it to pay off the premiums at once and be free of liabilities. However, you must know that the premiums for such plans are usually higher than the regular insurance policies.
Single Premium Payment
Paying a single premium for life insurance may seem more inexpensive and practical than paying the premium for the entire policy duration. However, that may not be the case always. Here the inflation rate plays a vital role, and you must consider taking advice from your financial planner before making the final purchase decision.
Let us understand how a single premium pay policy could cost you more.
Let us assume you buy a life insurance policy with a sum assured of ₹1 crore for 30 years. With the regular premium payment mode, you may have to pay an annual premium of ₹10,000. This effectively means you pay a premium of three lakhs over 30 years.
Now, with a single premium payment option for the same policy, you may pay a premium of ₹2.4 lakhs, which you may feel is ₹60,000 less. However, considering the inflation is at 6%, ₹2.4 lakhs amount to ₹13.75 lakhs after 30 years. Thus, you may be paying more in terms of the value of money over time.
Now that you know the different premium payment modes for life insurance policy choose the right one that best suits your needs.