The Long Read
Everything you *need to know* is right above this. Scroll down, only if you'd still like to read more (honestly, why?)
When you buy a term insurance plan, you have to choose your premium payment term (PPT) i.e. the time during which you have to pay all your premiums. There are three different term insurance premium payment terms available:
Single pay - You pay all the premiums of your term insurance policy at one go
Limited pay - You complete paying the premiums of your term insurance policy within a certain amount of years during your policy term. For example: Say you have a policy period of 20 years. If you want to pay all premiums by the 5th year of your policy you can opt for limited pay PPT.
Regular pay - You pay premiums regularly until the end of your policy
You should choose the regular pay option if
You do not have a lumpsum amount readily available to afford single pay
You want to pay a small amount as your premium that’s light on your wallet
You want the flexibility to change your term life plan benefits in the future
For example, you may find this option attractive if you are a salaried employee because you may not want to shell out a lot of money at one go as your term plan premium, especially if you are just beginning your career.
Find out which premium payment term suits you by taking the KlarifyLife Term Guide.
The answer will depend entirely on your convenience to pay your premiums. That’s all.
Let’s understand with an example:
Say you are a freelancer with irregular or cyclical income. Or you have gained a windfall from a one-time event, such as profit from share trading, ESOP payout at your startup, a legacy or even a large bonus at work. In this case, you may want to opt for a single pay premium payment term and pay off all your premiums at one go.
That way, you can get done with paying all your premiums early and continue to enjoy term plan coverage longer, even after you retire.
This is not entirely true, even if you have heard that choosing single pay or limited pay can help you save up to 60% and 40% in premiums, respectively. In reality, if you consider the inflation-adjusted value of your premiums, you will save less than 15%!
So you should instead focus on which premium payment term will allow you to comfortably pay off all the premiums for your term policy. And if you are worried about expensive premiums, find out what factors can impact your term insurance premium.
You may find the regular pay premium payment term to be attractive as it will be lighter on your wallet than other premium payment terms. Also, consider choosing your policy period till your retirement age only and not beyond that.
In regular pay premium payment term, the amount that will be debited for premiums will be lesser than limited pay or single pay terms. You may find this useful as being a salaried employee, you may not want huge premium debits to be made.
There is no right or wrong answer to this. You may be tempted to pay off your premiums at one go because it means you’ll never have to remember paying your premiums on time to avoid the risk of policy lapse.
But the final decision will depend on a lot of other factors. Consider these for example:
Will your lumpsum money be sufficient for you to pay off all your premiums in one go?
Do you want to invest this lumpsum money as per your financial plan?
Do you need to pay off a loan or meet an immediate big expense such as a healthcare cost?
You need to make a choice based on your financial requirement and ultimately choose a premium payment term that you will be comfortable sustaining.
You should choose the limited pay premium payment term for a period that you feel you’ll stay employed till. In this option, you only pay premiums up to a certain number of years in your policy period and not the whole period.
You can also choose single pay premium payment term but remember, this option may be heavy on your pocket as you will have to pay a large amount of money as your policy premium at one go.
Firstly, your profession should not influence the premium payment term you select, your cash flows should. You should choose a premium payment term that you’re comfortable paying.
Having said this, since you work in a hazardous profession, you have a higher risk of getting involved in an accident. That’s why, you can consider adding a waiver of premium rider, that will waive all your future term plan premiums if you get disabled due to an accident and are no longer able to pay your premiums, while keeping your term plan and its benefits active.
No, you shouldn’t.
Yes, it is true that in regular pay PPT, since you will be paying premiums every year till the end of your policy duration, you’ll be able to claim tax benefits throughout the policy period.
Whereas for single pay, you can claim the tax benefit only once and for limited pay, only up to a certain number of years in the policy period.
But having said this, don’t pick your premium payment term on the basis of tax benefits alone. Your convenience to pay your premiums is all that matters. You should pick a premium payment term that you can sustain easily based on your financial condition.
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