| What is the difference between policy term and premium paying term in term insurance? The policy term in a term insurance plan refers to the total duration for which the insurance coverage is provided, meaning the period during which the nominee can claim the death benefit if the policyholder passes away. On the other hand, the premium paying term is the time span within the policy term during which the policyholder is required to pay premiums to keep the policy active. While the policy term defines the overall length of the insurance protection, the premium paying term dictates the duration of premium payments, which can be shorter or equal to the policy term depending on the plan structure. Thus, one may pay premiums for a limited period but enjoy coverage for a longer term. |
A term plan isn’t just another product you buy off the shelf. It’s a long-term financial commitment. And to make the right choice, you need to understand certain terms really well.
Two such terms: Policy Term and Premium Paying Term, often confuse buyers. They sound similar, but they aren’t. And the difference between policy term and premium paying term can actually affect both your coverage and your premiums in very real ways.
Let’s break this down in plain English.
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What is Policy Term in Term Insurance?
The policy term in term insurance is the specific duration or number of years for which the term insurance policy remains active and provides life coverage. During this period, if the insured person passes away, the nominee receives the sum assured as a death benefit.
The policy term (PT) is selected at the time of purchasing the insurance and defines the length of protection the policyholder has. The coverage ceases once the policy term ends, and typically, no maturity benefit is paid if the policyholder survives the entire term (unless you have chosen a Return of Premium variant, which refunds all your base premiums if you survive the policy term). Above all, the policy term is a primary factor influencing the premium amount—the longer the term, the higher the total premium payable.
Key things to note about policy term:
- The policy term can range from 5 years to 40–50 years, depending on the insurer and the policyholder’s age and needs. This provides flexibility to choose coverage based on financial goals and retirement plans.
If you’re wondering whether opting for coverage till 99 years makes sense, we’ve broken it down for you here.
- Ideally, it should cover you until your major financial responsibilities are over (kids’ education, home loan, dependents’ expenses).
- Most term insurance plans have upper limits: the entry age is usually capped at 60 or 65 years, while the coverage (or maturity) age can extend up to 85, 99, or even 100 years, depending on the insurer. This age limit impacts both eligibility and premium costs.
- The ideal policy term often aligns with the retirement age minus current age, ensuring protection until the policyholder is financially independent or retired.
- If a term policy has a longer term, the cost of premiums could be higher, but it offers protection not just during the years when a person is working, but also after they retire.
In essence, policy term = how long you are covered
What is Premium Paying Term in Term Insurance?
The premium paying term in term insurance refers to the specific duration during which the policyholder is required to pay premiums to keep the insurance policy active. It can be equal to or shorter than the policy term.
For example, a policy with a 30-year policy term might have a premium paying term of only 10 years, meaning premiums are paid for 10 years but coverage continues for the full 30 years.
Premium paying term (PPT) can usually be one of three types.
It can be:
- Regular Pay: When Policy Term = Premium Paying Term, it is known as a regular pay plan, where premium payments cover the entire period of protection (e.g., 30 years of coverage = 30 years of premiums).
- Limited Pay: You finish paying premiums earlier (say, in 10 or 15 years), but your coverage continues till the end of the policy term. You enjoy coverage for the full policy term, which can help ease long-term financial commitment.
- Single Pay: You pay a one-time lump sum premium at the start, and you’re done.
Key things to note about premium paying term:
- It impacts affordability. Limited pay = higher annual premiums but no payments later. Regular pay = lower annual premiums but longer commitment.
- It offers flexibility to choose a payment structure that fits an individual’s cash flow and financial goals, allowing better financial planning.
- Single pay suits those with surplus funds, limited pay works for business owners or those wanting to complete payments early when income is higher and dependency is low, while regular pay is ideal for salaried individuals with steady income.
In short, premium paying term = how long you pay.
Difference Between Policy Term And Premium Paying Term
Here’s a quick comparison to make things crystal clear:
| Aspect | Policy Term | Premium Paying Term |
|---|---|---|
| Purpose | Provides financial protection to beneficiaries | Helps manage how and when you pay |
| Example | 35-year policy term = 35 years of coverage | Regular: pay for 35 years; Limited: pay for 10–15 years; Single: one lump sum upfront |
| Tax Implications | Death benefit amount is tax-exempt under Section 10(10D) for the nominees | Tax benefits apply on premiums paid under Section 80C (old regime); regular pay spreads benefits over policy term |
| Surrender Value / Exit Terms | Typically no surrender value; policy ends after term with no maturity benefit unless Return of Premium (ROP) opted | Limited/Single pay may have a minor surrender value. Also, some plans with exit/zero-cost features allow partial refund of premiums in a specific window |
| Changeability | Policy term is fixed at inception | Some insurers allow switching premium paying term mid-policy (e.g., regular to limited pay), subject to terms and approval |
Why the Difference Between Policy Term And Premium Paying Term Matters
Understanding the difference between policy term and premium paying term isn’t just technical jargon, it’s crucial for your financial planning as it influences premium amounts.
- Coverage vs. Cost: A longer policy term means more years of protection. A shorter premium paying term means higher premiums now but zero payments later in life.
- Retirement Planning: Many people prefer to finish premium payments before retirement or even their late 40s so they aren’t burdened during non-earning years or if they are planning to retire early. Limited pay options serve this purpose well.
- Flexibility: You can customise your plan based on your earning capacity today vs. your future responsibilities. This is supported by insurer offerings (e.g., customizable PPT from HDFC, Tata).
- Tax Implications: Premium payments in term insurance are generally eligible for tax deductions under Section 80C of the old regime during the period you pay them. With regular pay, these benefits spread evenly across the entire policy term, while with limited pay, you can claim higher deductions in the years you’re paying premiums but none once payments stop.
For effective financial planning, it’s important to consider the difference between policy term and premium paying term and choose a combination that matches your income and coverage needs.
How to Decide the Right Policy Term and Premium Paying Term
There’s no one-size-fits-all answer. Choosing the right Policy Term (PT) and Premium Paying Term (PPT) for your term insurance plan is a highly personal decision that varies widely from person to person. It depends on:
- Your current income and expenses
- How long you want to keep paying premiums
- The financial milestones you want your policy to cover
The difference between policy term and premium paying term is a key factor when deciding whether to opt for regular pay, limited pay, or single pay. But remember: Getting a sufficient amount of coverage should always be your first priority, followed by choosing the right policy term, and then the premium paying term. The goal is to make sure your family is well protected during the higher dependency years (usually the first 10–20 years), so the sum assured must be adequate before you worry about tweaking terms or premiums.
Ditto's Tip
When choosing a term insurance plan, it’s important to grasp that not all insurers offer the same flexibility regarding Policy Term (PT) and Premium Paying Term (PPT). Here's what Ditto recommends based on the latest updates from leading insurers:
- Customizable Premium Paying Terms: Leading insurers like HDFC Life and Tata AIA now allow policyholders to customize their premium paying terms rather than sticking to fixed durations like 5, 7, 10, 12, or 15 years. This means you could choose a 9-year pay or an 11-year pay plan to better match your cash flow needs, offering greater financial flexibility.
- Policy Term Flexibility: While many insurers offer term policies with coverage periods ranging from 5 up to 40 or 50 years, some, such as Tata AIA and ICICI Prudential, provide whole-life coverage options. These plans extend protection well beyond the traditional fixed-term limits, catering to the desire for lifelong security.
Conclusion
The difference between policy term and premium paying term is simple, but it can change everything. Policy Term decides how long you stay protected. Premium Paying Term decides how long you keep paying.
Get this part right, and you’ll have a term plan that not only protects your family but also fits neatly into your financial plan. In short, choose enough years of coverage, pick a payment style that matches your finances, and you’ll have a term plan that truly works for you.
Still confused? Don’t worry. Insurance can get tricky, but that’s exactly why Ditto exists. Talk to our IRDAI-certified advisors—for free, no spam, no pushy sales, just unbiased expert advice. Book a free call now and get clarity.
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