Term plans have multiple facets that you should endeavor to know more about. For starters, have you thought about premium payment terms or PPT as they are called in the industry? It is the starting point of the discussion centering on the various premium payment options offered by insurers. In this article, you will learn more about limited and regular pay as concepts in term plans. However, it is important to understand the core concepts first before we explore deeper into these two terms and their meanings.
PPT and Different Premium Payment Types
PPT stands for the Premium Payment Term. It indicates the total years for which a policyholder has to pay premiums. This can either be the same as the policy’s tenure or lower. For example, suppose you purchase a term policy for 30 years. In this case, the PPT will be either 30 years or less.
Coming to the different premium payment choices out there, they usually include the following:
- Regular Pay: The term of the premium is equivalent to the policy’s tenure
- Limited Pay: The time for paying premiums is lower than the life coverage tenure
- Single Pay: Policyholders can only make one lump-sum payment for their insurance plans
Now that you know the basics, let us look closely at regular and limited pay.
What Is Regular Pay in Term Insurance?
The regular pay system works based on a core principle. Here, the insured individual has to pay the premium amount for the entire tenure of the term policy. The policyholder can flexibly select the premium payment option. Monthly, half-yearly, and yearly options are available, with the PPT and policy term being the same. For example, suppose you get a term plan for 20 years. In this case, you will pay premiums for 20 years and get coverage for the same duration.
What Is Limited Pay In Term Insurance?
The principle governing this framework is slightly different. Here, the policyholder will only pay the premiums for a pre-fixed tenure. The tenure of premium payments will be lesser than that of the policy. However, life coverage will stay the same for the whole policy term. Premiums may be paid whenever the policyholder has ample funds in hand.
An example will suffice to explain the concept to you. Suppose you get a term policy for 20 years at the age of 40 and want to retire from service at the age of 50 while paying all the premiums that are due in only 10 years. Hence, in this scenario, you will only pay the premium until you are 50 years of age in this scenario. After that, while you will not pay premiums, the life cover will continue for another 10 years.
Comparing Regular Pay And Limited Pay
Here is a comparison between the two concepts that will help you understand their core differences.
|Aspect||Limited Pay||Regular Pay|
|Time of Premium Payment||Smaller than the term of the policy, while the policyholder only pays premiums for a pre-agreed tenure||Same as the policy term and is a long-term commitment|
|Coverage||Irrespective of premium payment for a limited time, there is full coverage on offer||Full coverage for the entire tenure of the policy|
|Premiums||They do not increase with age since they have to be paid within a pre-fixed timeline||They may increase with age|
|Financial Impact||Financial load for a particular period only||Distributed financial impact throughout the policy tenure|
|Tax Benefits||May help maximize tax deductions on premium payments||These are distributed throughout the policy years with limited deductions available|
|Surrender||No policy termination option owing to non-payment||No loss in case the insured person wishes to surrender the policy. The policyholder will also get an adjusted value from the insurance company|
|Lapses of the Policy||Possibilities of policy lapses are lower since the payment time is shorter||No benefit given to the policyholder if the policy lapses, due to evading premium payments|
|Discounts||There could be some savings on premiums owing to advance payments||No other special discounts are available on premiums|
Now that you have a better picture of what these two terms mean, which one should you choose? Let us examine the specifics in this case.
Which Payment Option Is Right For You?
Remember that your choice will depend on your circumstances, life goals, and financial situation. Limited pay is better for those with smaller career durations, like athletes and others. It also suits those working in either risky or unpredictable environments (army and navy personnel, etc.) and businesspersons and professionals without a fixed income. It is also suitable for those nearing retirement but with coverage requirements till a higher age.
Regular pay is for those with fixed incomes who can distribute premium payments for maximum affordability and convenience. Salaried employees may consider regular payment options, particularly those who are young and wish to gain long-term coverage till retirement. Take your decision carefully and use a term plan calculator to work out the premiums for your chosen coverage amount. It will help you understand how to fit the same into your monthly budget.
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