Say you are about to purchase a term insurance plan, considering that you want to ensure the future financial security of your family in the event of your unfortunate absence. While this is definitely a smart financial move, you would need to consider a significant factor—you are entering into a long-term financial commitment.
What you need (apart from acknowledging the best term life insurance providers and best term insurance plans in India) is a thorough knowledge of a few crucial features. Two such features are Policy Term And Premium Paying Term. While they may sound similar, they aren’t! While both significantly impact policy premiums and coverage, the purpose of each is uniquely different.
So, let’s check out the difference between Policy Term And Premium Paying Term in term life insurance plans. If you are planning to purchase this policy, you wouldn’t want to skip this read!
QUICK LOOK: What is the Difference Between Policy Term And Premium Paying Term?
| Metrics/Aspects | Policy Term in Term Insurance Plans | Premium Paying Term in Term Insurance Plans |
|---|---|---|
| Definition | The duration for which the term insurance coverage is active. | The period across which a policyholder is required to pay premiums. |
| Significance | Provides coverage to the policyholder for a pre-decided number of years. | Decide the duration for which you need to make premium payments towards your term insurance plan.. |
| Duration | The usual recommendation is up to a few years after retirement since, for term insurance plans, the main purpose is income replacement in case the insured passes away during the policy tenure. However, it may vary since it depends on multiple factors. | Can be equal to or shorter than the policy term. |
| Impact on Coverage | Coverage continues until the end of the policy term. | While the premiums are paid during the Premium Paying Term (or across it), the coverage will be as long as you have chosen. |
| Quick Example | A ₹1 crore coverage for 35 years means if the policyholder passes away anytime during these 35 years, the insurer will disburse the ₹ 1 crore (plus rider benefits, if any) to the beneficiaries. | USE CASE: ₹1 crore coverage for 35 years CASE 1: If you chose a regular Premium Paying Term, your premiums will continue for 35 years. CASE 2: If you chose a single premium payment mode, your premiums are done and dealt with at the very time of purchase. CASE 3: If you chose limited pay premium payment mode, your premiums can get over within your chosen duration/time limit (5, 7, 10, 12, 15 years or pay till the insured turns 60) |
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What is Policy Term in Term Life Insurance Plans in India?
In term life insurance plans in India, the policy term refers to the specific duration during which the coverage is active. If the insured passes away during this period, the policy pays a death benefit to the beneficiaries. If the policyholder survives the policy term, the coverage typically ends without any payout unless it is a return-of-premium term plan.
Here are key points about the policy term in term life insurance plans:
- Flexible Duration: Policy terms can range from as short as 5 years to as long as 40 or even 50 years, depending on the insurer.
- Choice of Term: The policyholder can choose the term based on their needs, such as matching it with key financial responsibilities like a mortgage or children’s education.
- Coverage Period: The policy term defines the coverage's duration. Once the term ends, no benefits are payable unless the insured dies during the policy term.
- Age Limit: In India, most term insurance plans offer coverage up to a certain maximum age, such as 65 or 75.
The policy term should ideally align with the period during which the policyholder expects to have financial dependents or liabilities.
What is the Premium Paying Term in Term Life Insurance Plans in India?
In term life insurance plans in India, the Premium-Paying Term (PPT) refers to the period during which the policyholder is required to pay premiums to keep the insurance coverage active. The PPT can vary based on the policy, and it is important to choose one that suits your financial planning.
Here are key details about the premium paying term in term life insurance plans:
- Equal to Policy Term: In most term life plans, the premium paying term equals the policy term. For example, if you choose a 20-year policy, you pay premiums throughout the 20 years.
- Limited Pay Option: Some policies offer a limited pay option, where the premium paying term is shorter than the policy term. For example, you may pay premiums for 10 years while being covered for 20 or 30 years.
- Single Pay Option: Certain policies offer a single premium option, in which the premium is paid upfront in one lump sum for the entire policy term.
- Regular Pay: This is the most common option, in which the premium is paid at regular intervals (monthly, quarterly, annually) throughout the policy term.
- Flexible Options: Insurance providers offer flexibility in choosing the premium paying term, allowing policyholders to align premium payments with their financial goals.
The premium-paying term should be selected based on your ability to make regular payments and how long you want to pay for the policy.
What is the Importance of Policy Term and Premium Payment Term for Policyholders?
The policy term and premium payment term are crucial for policyholders in life insurance plans, as they directly impact coverage, affordability, and financial planning. Here's why they are important:
| Policy Term in Term Insurance Plans | Premium Paying Term in Term Insurance Plans |
|---|---|
| Coverage Duration: The policy term determines how long the life insurance policy will financially protect you and your dependents. A longer policy term ensures extended protection, especially for those with long-term financial responsibilities such as home loans or children’s education. | Affordability: The premium-paying term affects how long and how much you will need to pay for the policy. A shorter premium-paying term (single pay) means lump sum premium amounts in the short term but no need for payments later, while a longer premium-paying term spreads out the cost, making premiums more affordable on a regular basis. |
| Alignment with Financial Goals: You can align the policy term with key life stages or obligations. For example, choosing the right policy term is critical if you want protection until retirement or until your children become financially independent. | Flexibility in Payment: Some policies allow limited or single premium payments, where you can finish your premium obligations early but still enjoy coverage for the entire policy term. This is useful for those with fluctuating incomes or who prefer not to have long-term payment commitments. |
| Financial Planning: A flexible premium payment term policy allows policyholders to match payments with their earning capacity and future financial planning. For example, some people may prefer to complete their premium payments while still actively earning and not worry about it during retirement. |
Combined Impact:
- Ensures Coverage While Premiums Are Paid: With the right combination of policy terms and premium payment terms, policyholders can ensure they have life coverage while balancing their current financial situation. For instance, a limited premium payment term with a longer policy term can provide peace of mind with no payment obligations in later years.
- Customisation: Policyholders can customise their plans to suit their financial goals, ensuring they receive the necessary protection without burdening their finances.
In short, the policy term ensures coverage for an appropriate duration, while the premium payment term allows flexibility in how and when you pay for that coverage. Both should align with your long-term financial goals and current financial situation to provide the best benefits.
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