Two friends, Lucky and Sadanand, discuss different options that exist in life insurance premium payments which allow payments to be made in a shorter time.

Sadanand: Lucky, how is it that you still haven’t purchased a life insurance? Do entrepreneurs, like yourself, get a free pass on life that I am not aware of…

Lucky: Ha-ha. Well, having quit my regular job I don’t have the luxury of a constant income stream that you do. Managing a premium payment plan, extending into the next 30 years is something I cannot visualise right now.

Sadanand: In that case you can choose limited premium payment option. The premium payment term can be brought down to 5/10/15 years, as per your ‘visibility’ instead of the 30-40 year tenure that is stressing you out. And before you start wondering, the limited term does not mean your coverage period will be reduced. It is only your premium paying term that is being adjusted.

Lucky: Ok. This is a nice alternative to regular policies with long payment plans.

Sadanand: Yes, regular plans involve regular payments over the policy term. Frequency can be monthly, quarterly, or yearly, but the policy paying period is the same as the coverage period. Limited payment plans also offer the same frequency, but you can choose the number of years you would make payments — 5/10/15 years, for instance.

Lucky: So, the benefits are the same, but the payment period is shorter. I guess they will be costlier i.e. extra premium if, for instance, I choose 10-year premium payment plan instead of 30-year regular payment plans.

Sadanand: Yes, shorter payment periods will mean higher premiums. But if you involve the time value of money and the opportunity cost of funds, then at 5 per cent opportunity cost, you are breaking even between the plans. But if your opportunity cost is more than 5 per cent, you should go for longer payment plans or regular plans, because you can generate higher returns on the cash saved due to lower premium.

Lucky: I don’t think savings are a priority for me. I am interested in lower duration of payments, meaning lower chance of missing payments.

Sadanand: Yes, one main advantage is that risk of policy lapsing on account of missing or irregular premium payments is lower in limited premium payment plans. Also, higher outgo implies a higher tax benefit under Section 80 C as long as it is within the ₹1.5-lakh-a-year cap.

What’s the alternative!
Same benefits, shorter payment period
Premium payment term as per ‘visibility’
Higher outgo implies higher tax benefit

Lucky: That way, this plan seems to be made for me alone.

Sadanand: Policyholders with irregular income streams, self-employed professionals, and people with short career spans can benefit with this plan. There is a variant in such plans suited for people nearing retirement. In such plans, you pay premiums till you reach the age of 60 and the policy provides cover till you are 80 and above. So, no matter if you are 50 years or 30 years, premiums are collected in the working age and cover is provided in your silver years. So, people nearing retirement age can also benefit from this.

Lucky: Is there a bullet payment option as well?

Sadanand: Yes, lump-sum option is also a variant in such plans. One-time lump-sum payment for protection and that too without any pending liability. People who receive a large cash-flow and want to secure their family at one go prefer such plans.

Lucky: Hey, that was useful information. I believe that income streams may vary, but protection should not.

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