A term life insurance is one of the affordable investment avenues if you are looking for the financial security of your loved ones.
How term insurance works
A term policy requires you to pay premiums for a specific period, and in case of an unfortunate incident during the tenure, the nominees receive the financial cover. As the term policy only offers the benefits in case of the policyholder’s passing, the premium is lower, and the nominees get a high sum assured. As an additional advantage, you receive an annual tax deduction of up to INR 1.5 lakh under Section 80C of the Indian Income Tax Act, 1961.
When you purchase a term plan, you will have different options regarding the payment of premiums. Read on to understand them better.
Types of premium payment options
When it comes to the premium payment alternatives, the payment frequency and duration until when you need to pay are the two most important factors. If you do not choose the right premium payment option, you may end up paying a higher amount. The term of the premium payment is the period during which you need to make the payments. It may or may not be equal to the tenure of your policy.
Usually, a term plan comes with three premium payment choices, which include:
- Regular payment
For the regular payment option, the premium payment term and the policy term are always equal. For example, if you are buying a term policy for 20 years, you will have to pay premiums for the same duration. In this payment option, you end up paying the highest premium.
- Limited payment
For the limited payment term, you need to pay the premiums for a fixed time-frame, which is shorter than the policy tenure. Hence, if you have a term plan for 20 years, you may have to pay the premium for 10 years, depending on the policy.
- Single payment
For a single payment term, you need to make a one-time premium payment in the form of a lump-sum.
Comparison of premium payment terms with an illustration
Now that you know the term insurance plan meaning and choices for premium payment, let us look into an example to understand how they differ from each other.
Suraj is a 30-year-old working individual who is buying a term insurance worth INR 1 crore with a policy tenure of 50 years. If he chooses the regular premium payment option, his yearly due will be about INR 29,000. Hence, he will have to pay a total of INR 14.5 lakh in 50 years. However, if he opts for the limited payment option, and his payment term is 10 years, he will have to pay a much higher annual premium of about INR 62,000. Thus, he will pay a total premium of INR 6.2 lakh for 10 years. This will allow him to finish paying the premium earlier. Moreover, he will pay less than half in premium as compared to a regular payment term.
If he decides to go for the single payment option, the total premium due will be lower than the regular payment option. However, this will not be the case, as he needs to consider the aspect of inflation as well.
Which one to choose
The right premium payment term option depends on certain factors like your ability to pay and current age. If you cannot pay the lump sum or a half-yearly amount, the regular payment option is the most suitable. However, if you are an older person buying a long-term plan, a limited or single payment option may serve you better.
To find the best option, you can opt for an online term policy, wherein you can easily compare the different choices.