15 Jul, 2021 | Term Life Insurance

What is Limited Pay in Term Insurance? Pros & Cons of Limited Pay Vs. Regular Pay

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Usually - you buy a term insurance plan until a particular duration - and pay regular premiums until the end of that duration. Say - your term insurance plan is until you’re 65 years old, based on your preference you’ll pay premiums every year or month - until you reach the age of 65. 

But - do you think you can afford these premiums throughout your lifetime? Say - 15 years later when your income might not be as high as it is today, or post retirement (if you’ve taken a long-term cover) where you’re dependent on a much smaller pension. This could also be the case if you’re a businessman working with an unpredictable future income. 

How do you address this challenge? How can you have a term insurance cover for the entire duration - without keeping the burden of premiums for the entire period?

Introducing Limited Pay option under Term Life Insurance 

Using the Limited Pay feature, you can pay off all your premiums in larger instalments early in life - and you enjoy a worry-free cover, until the end of the term period. If you have any doubt about your ability to pay premiums until the very end of the policy term, you should choose the Limited Pay option.

You can choose a specific term of payment - say, 10 years, 20 years or 30 years during which you’ll make the premium payments and get the burden off your chest. Of course, the yearly premiums will vary depending on the term you choose. 

Let’s take an example. 

Comparing Limited Pay Vs Regular Pay - Aggregate of moneys paid. 

Akshay, 25, buys a term insurance policy of INR 1 Crore until age 70. Here’s the comparison of the premiums he’ll pay in both cases - Limited pay and Regular pay. 

 

No. of years Premiums are paid

Yearly Premium Amount

Total Premium paid over the term

Regular Pay

45 years

19,932/-

8,96,940/-

Limited Pay

30 years

20,672/-

6,20,160/-

Limited Pay

10 years

38,904/-

3,89,040/-

Limited Pay

5 years

76,326/-

3,81,630/-

When you take these amounts on face-value it might feel like you’re getting a much better deal, paying off premiums through Limited Pay - especially in shorter periods like 5 years/ 10 years. 

Comparing Limited Pay Vs Regular Pay - Inflation Adjusted

But you’re missing something here. There’s something called the ‘Time Value of Money’. Basically, it’s based on the fact that the ‘value of money’ depreciates over time - and so 100 rupees today are not equivalent to 100 rupees ten year down. And any amount of money you pay early in life has more ‘value’ than the same amount you pay later. 

To understand the Time Value of Money - we use a calculation called the NPV or the Net Present Value - for all the premiums that are calculated for Limited Pay or Regular Pay modes. 

With the NPV taken into consideration, here’s how the above table looks. 

 

No. of years Premiums are paid

Yearly Premium Amount

NPV of Premium @ 6%

Regular Pay

45 years

19,932/-

3,26,549/-

Limited Pay

30 years

20,672/-

3,01,619/-

Limited Pay

10 years

38,904/-

3,03,517/-

Limited Pay

5 years

76,326/-

3,40,803/-

While it is clear from this NPV calculation - that the Limited Pay option with 30 years or 10 years is a slightly better alternative than Regular Pay - the difference is not as drastic as you might imagine. Further, you should note that a 5 year Limited Pay is actually costing Akshay more than Regular Pay - but this is only for this particular combination of customisations.

The NPV calculation for you might look very different from this. So, the only way is to make your financial advisor do a detailed calculation, compare options and make the decision. 

Pros & Cons of Limited Pay Vs Regular Pay : Is cost the only factor to consider? 

The pros or cons of a Pay mode (Limited or Regular) go beyond the cost factor alone. You should not base your decision only on the cost difference, but should consider other situational factors based on your lifestyle, income patterns etc. 

Here are some differences you should be aware of. 

1️⃣ Shorter premium paying duration

In the regular pay option, you’ll have to pay the premiums until the end of the policy term. But if you choose the limited pay option, you can get the payment liability off your chest by paying the premiums in faster and shorter instalments. If you are a person who likes to be unburdened of financial responsibilities quickly (say you even prefer paying off your loans ahead of time just to be done with them…) you should choose a Limited payment option. 

2️⃣ Finish paying premiums before retirement

If you buy a long-term or ultra long-term policy (with regular pay) you will have to continue paying premiums even after you retire. This means you’ll need an adequate source of income post retirement too, and this might not be feasible. However, if you select the limited pay option, you don’t have to worry about this as you’ll finish paying off all your premiums before you retire. 

3️⃣ Reduced chances of policy getting lapsed

When you’re required to pay premiums for a longer period, there are possibilities that you might miss a premium payment. This could result in your policy getting lapsed and you'll lose your coverage and your family will end up without a cover. In the limited pay option, you won’t have to worry about this for a long time. Once you’re done with your premiums, you can sit back and relax because your family is adequately protected, no matter what happens to you. 

Summing up!

Limited Pay might be most helpful if you expect to have an undependable income pattern later in life, a shorter career span or plan to take a policy beyond your retirement age. While the NPV difference might not be much, ensure you get your financial advisor to make the calculation before you decide the option that is right for you. 

Want to check which Term Insurance plans offer Limited Pay options preferable to you? Just hop on to Beshak⭐Ratings - and you can compare 100+ features including Limited Pay, across the top plans in the market. It is accessible for free, for all our community members. 

Got a question that’s not answered in this article? Post it on the Beshak forum and get answers from insurance experts, for free!

Key takeaways
  1. Limited pay is an option that allows you to finish paying off your premiums quickly in larger instalments and enjoy the cover for the full term duration. 
  2. There are fewer chances of you missing the premium payment if you choose the limited pay option and you won’t have to worry about the policy  getting lapsed.
  3. If you buy a policy for a long term and choose limited pay, you won’t have to worry about how you’ll pay the premiums post retirement as you’ll finish them off early in life. 
  4. Before deciding which option to choose - regular or limited pay, make sure you ask your advisor to calculate the NPV of the premiums.
Team Beshak
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Team Beshak, We breathe insurance :)

We are a group of young members of the Beshak community. We come together to brainstorm, write relevant and useful content for people (just like us) who want to figure insurance on their own. If you too want to share inputs/write for us - send us a "hey" to info@beshak.org

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