Insurance is a financial tool that provides peace of mind and security for your loved ones in the event of your passing. Its like a Plan B to safeguard your family’s financial plans when you are not there.
When selecting a life insurance term plan, you often find yourself contemplating between two primary options:
- Regular Premium Paying Term Plan.
- Limited Premium Paying Term Plan.
Regular Premium Paying Term Plan
Regular-term plans require you to pay premiums consistently throughout the entire policy term, offering coverage throughout the desired policy term.
Basic features of regular paying term plans are:
Affordability: Premiums for regular-term plans are typically more affordable.
Long-Term Commitment: You commit to paying premiums over the policy’s entire duration, which may be a more extended financial commitment.
Limited Premium Paying Term Plan
Limited-paying term plans allow you to pay premiums for a limited number of years while ensuring coverage for the entire policy term.
Here are some key considerations:
Shorter Commitment: These plans seems ideal if you want to get rid of insurance premium obligations in a short period of time. Though you pay for limited term but you have coverage for whole term of the policy.
Higher Premiums: The condensed premium payment period results in higher premium amounts per year, though it is for a limited number of years.
To compare which plan is better, let’s create two scenario:
Scenario 1: Regular Paying Term Plan- Mr. X, whose age is 30 years. He opts for a term plan with a sum assured of ₹ 2 crores, till the age of 70 years. He opts to pay for a regular premium, where he will pay a premium of Rs. 23245 for 40 years annually.
Scenario 2: Limited Paying Term Plan- Mr. Y who is 30 years old and opts for a limited paying term plan with a sum assured of Rs. 2 Crores. He wants to pay Rs. 107629 annually as premium for 5 years and want a cover till the age of 70 years.
We have two cash outflows for the premium payment:
1) Regular Premium Payment: Rs. 23245 * 40 Years = Rs. 929800
2) Limited Paying Term: Rs. 107629 * 5 Years = Rs. 538145
In the first go limited paying term payment plan looks attractive as the total cash outflow of Rs. 538145 is less compared with the Rs. 929800 in regular payment plan. But here we ignore the impact of ‘Time’, which will actually decide which cash flow is really cheaper.
We will have to compare the present values of both the cash flows, before jumping on to any conclusion. Present value is the value in today’s terms, which could be invested in any investment product at say 8% and the whole cash outflow can be paid for the said tenure, with the today’s value (principle) & 8% gain and the net residual value after paying for the cash outflow is zero.
Present values of both the cash flows are:
1) Regular Premium Payment: Rs. 299362
2) Limited Paying Term: Rs. 464109
This suggest that in case of regular premium payment, you will have to invest Rs. 299362 at 8% and can withdraw Rs. 23245 annually to pay premium for 40 years. While in the case of limited paying term you will have to invest Rs. 464109 to pay the premium for 5 years. Further simplifying, it means that you can pay total cash outflow of Rs. 929800 by investing 299362 at 8% in 40 years. While you have to put aside Rs. 464109 to pay the total cash outflow of Rs. 538145 in 5 years at 8%.
Now you can clearly see how much you lose by opting for a limited paying term.
Please refer to below table to see how it will work out:
Regular Paying Term Plan
| Year | Amount at End of the Year | Year | Amount at End of the Year | |
| 1 | ₹2,98,207.06 | 21 | ₹2,41,094.52 | |
| 2 | ₹2,96,959.02 | 22 | ₹2,35,277.48 | |
| 3 | ₹2,95,611.15 | 23 | ₹2,28,995.08 | |
| 4 | ₹2,94,155.44 | 24 | ₹2,22,210.08 | |
| 5 | ₹2,92,583.27 | 25 | ₹2,14,882.29 | |
| 6 | ₹2,90,885.34 | 26 | ₹2,06,968.27 | |
| 7 | ₹2,89,051.56 | 27 | ₹1,98,421.13 | |
| 8 | ₹2,87,071.09 | 28 | ₹1,89,190.22 | |
| 9 | ₹2,84,932.17 | 29 | ₹1,79,220.84 | |
| 10 | ₹2,82,622.15 | 30 | ₹1,68,453.91 | |
| 11 | ₹2,80,127.32 | 31 | ₹1,56,825.62 | |
| 12 | ₹2,77,432.91 | 32 | ₹1,44,267.07 | |
| 13 | ₹2,74,522.94 | 33 | ₹1,30,703.84 | |
| 14 | ₹2,71,380.17 | 34 | ₹1,16,055.54 | |
| 15 | ₹2,67,985.99 | 35 | ₹1,00,235.39 | |
| 16 | ₹2,64,320.27 | 36 | ₹83,149.62 | |
| 17 | ₹2,60,361.29 | 37 | ₹64,696.99 | |
| 18 | ₹2,56,085.59 | 38 | ₹44,768.15 | |
| 19 | ₹2,51,467.84 | 39 | ₹23,245.00 | |
| 20 | ₹2,46,480.66 | 40 | (₹0.00) |
Limited Paying Term Plan
| Year | Amount at End of the Year |
| 1 | ₹3,84,999.37 |
| 2 | ₹2,99,560.00 |
| 3 | ₹2,07,285.48 |
| 4 | ₹1,07,629.00 |
| 5 | (₹0.00) |
Understanding this table:
In case of Regular payment you have to pay first year premium at the start from Rs. 299362, so the remaining amount left for investing is Rs. 276117, which will become Rs. 298207 at the end of first year at the rate 8%. Then you keep on paying premium annually by withdrawing it from the corpus. Same in the case of limited paying term plan.
Based on the time value of money & taking financially wise & informed decisions, the regular premium option seems to be the more financially efficient choice for you. However, it’s important to consider other factors such as your ability to plan your finances & to make provisions for future cash flows today.
Hope now you will have a clear understanding of which payment plan to opt while selecting term plans.
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