How to choose the right premium payment term for your life insurance policy

There are many critical aspects one needs to be clear about before clicking ‘Buy Now’ on a life insurer’s or insurance aggregator’s portal. Among these is the premium payment term and frequency. If you choose an option that is not appropriate for you, it may burn a hole in your pocket.

Premium payment term (PPT) is the duration for which the policyholder has to pay premium. This is not necessarily equal to the term of the policy as commonly presumed. Insurers give different options on premium payment term (single/limited/regular) and also frequency of payment of premium (monthly/quarterly/half-yearly/annual).

Premium payment term

Term life insurance

There are three different options that insurance companies offer policyholders — single/limited/regular premium payment.

In single premium policies, you pay the premium for the entire term of risk cover in one shot. In limited PPT, the premium payment is for a fixed number of years that is shorter than the policy term. In regular PPT, the premium payment term is equal to the policy term; the number of years you have to pay premium is equal to the total number of years you are covered by the policy.

Note that the total premium you will pay will be the highest in regular PPT option.

Say, you are a 35-year old male. The annual premium on a life insurance cover of ₹1 crore for a 50-year term under the regular PPT option with HDFC Life will be ₹29,091. Over 50 years, you will shell out ₹14.54 lakh. Had you chosen a limited PPT of 10 years, the annual premium would have inched up but the total outgo would have been lower. The annual premium for a 10-year PPT would be ₹62,300; that means, over 10 years, your total outgo is ₹6.22 lakh, presenting a saving of ₹8.31 lakh compared to the regular PPT.

The advantage of the limited premium payment option is also that you can finish your premium payment early (before retirement). It is of particular help to people with short-span careers, such as movie/drama artistes and stage performers. With the limited PPT option, where the annual premium is higher, one will also be able to maximise the benefits under Section 80 C of the Income Tax Act that allows deductions up to ₹1.5 lakh from income.

In a single PPT option, the premium may shoot up above the Section 80C limit for many, but it is still worth checking out as the savings are significant. Continuing with the earlier example of a 35-year-old male, the premium for a ₹1-crore life cover in single PPT option will be ₹4.86 lakh.

However, before you decide on PPT options, do give a thought to your finances. If you already have other commitments, you may not be able to cough up the high premium under limited/single PPT options. Also, note that in both limited and single premium payment options, you are paying the premium for the entire period of risk cover in advance; so, if death occurs early on, a vast portion of the premium is ‘wasted’.

Endowment insurance

In endowment life insurance, if you want to maximise your returns, you will have to go with the longest PPT the insurer offers.

The longer the premium is invested, the higher the return in any investment tool, and it holds true in endowment plans, too.

Take, for instance, ICICI Prudential’s Assured Savings Insurance Plan (ASIP), a non-par endowment plan. The internal rate of return (IRR) in this product (policy term 15 years) for a 40-year-old paying ₹1 lakh premium annually for five years comes to 4.89 per cent (maturity value ₹9.32 lakh); if the PPT is seven years, the IRR comes to 5.15 per cent (maturity value ₹12.85 lakh).

Premium payment frequency

Deciding on the frequency of payment is also critical. While annual payments are common, you can choose to pay half-yearly/quarterly/monthly if you think you will not be able to shell out the entire sum of annual premium at one go.

That said, note that your total premium outgo for a given PPT will increase as you increase the number of instalments in a year. If, for instance, a 35-year-old male chooses to take a term policy of ₹1 crore with HDFC Life for a 50-year term and chooses regular PPT, as indicated earlier, he will pay ₹29,091 a year and in 50 years he will pay ₹14.5 lakh. But, if he chooses half-yearly premium payment, his due every six months would be ₹14,836 and he will be paying a total of ₹14.8 lakh by the end of 50 years; if he chooses monthly instalment, his due every month would be ₹2,545; by the end of 50 years, he would have paid ₹15.27 lakh.

While it may be easier on your pocket, payment of insurance premium in instalments means every month/quarter/half-year you will have to renew the policy without fail. If you forget, the policy will lapse.