Limited Pay or Regular Premium Payment Mode - What should you choose?

• Introduction
• What is Regular Pay? 
• What is Limited Pay?
• How to choose the right payment option? 
• Is Limited Pay cheaper than Regular Pay?

When you buy term insurance, you’ll have to make several choices to customize your term insurance based on your family’s needs e.g. deciding how your nominee should receive the claim payout,  which riders are suitable for you, deciding whether you choose a fixed Sum Assured option or the increasing cover option, etc. In addition, you must know that you can also customize the premium payment duration (i.e. for how long you pay premiums of your Term Insurance).

Broadly, there are 3 forms of premium payment duration that a policyholder can choose - Regular Pay in which the premiums are paid throughout the policy term, Limited Pay in which the premium payment duration is less than policy duration, and Single Pay where the premium is paid only once at policy inception. 

Regular Pay is the most used premium payment method followed by Limited Pay. Let’s learn them in more detail in this article and find out which one you should choose.

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In this, your premium payment duration is equal to the policy duration. Thus you have to pay the premiums until the end of your policy term. Based on your convenience, you can choose how frequently you want to pay the premiums - monthly, quarterly, half-yearly, or annual premium payment modes.

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Under the limited pay option, you can pay off all the premiums of your plan in a few years and enjoy the plan's benefits till the end of its duration. 

Let’s understand the difference between limited pay and regular pay premium payment options with the help of an example.

Aarav, a 30-year-old, is planning to buy a term insurance policy for 40 years (the policy will remain active until he is 70 years old). He also wants to retire from active employment by the age of 60 years i.e.  - once he turns 60, he will not have any regular/fixed income.

Please note: No matter which premium payment option Aarav chooses, he’ll be covered under the policy for the entire 40-year duration provided he pays all his premiums on time.

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Regular Pay or Limited Pay - While deciding your premium payment option, you should take into consideration your current and future finances.

Choose Regular premium payment mode if - 

1. You prefer breaking the premium amount into smaller payments.
2. You are likely to have a predictable and stable income pattern throughout the term of the policy
3. You plan to take a cover that ends before your planned retirement age. 

Choose the Limited pay option if - 

1. You want to get the payment liability off your chest quickly.
2. You have a limited career span or expect an unstable, unpredictable income.
3. You plan to take a cover, way beyond your planned retirement age.

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Not essentially. One of the main reasons people believe that the sum of the premiums they pay in limited pay term insurance is lower than what they pay under the regular pay term insurance is that they do not consider the time value of money when calculating the premium. 

Let’s understand this better with the help of an example.

Say Virat, a 30-year-old non-smoker, wants to buy an INR 1 Crore policy until age 75. 

Here is the comparison of the present value of premiums he’ll pay in both cases - Regular and Limited pay.

After calculating the Net Present Value of the premium paid in both cases, you’ll see that the 5-year Limited Pay option costs Virat more than the Regular Pay option in terms of Net Present Value. Whereas the Limited Pay options of PPT 30 years and 10 years are slightly less costly than the Regular Pay option in terms of NPV. Note, however, that the difference in the Net Present Value of premiums across these scenarios is not significant. 

So, the choice between Regular Pay and Limited Pay should be really made depending on your current & future affordability of premium amounts (refer to the previous section).

Note: This is a very specific use-case, and the NPV calculation for you might look very different from this. The benefits under both the options could vary based on the insurer, the type of plan, and the payment term you choose. 

Therefore, we recommend that you - 

• Take a look at your financial life. Use the limited pay option if it is the most suitable choice. For example, if you expect to have an unpredictable income pattern in the future. 
• Do not blindly follow any thumb rules. And...
• Ask your advisor to calculate NPV on the cash outlays before arriving at a decision. 

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Summing up!

Limited Pay can be a great option for you if you wish to finish off with your responsibility of paying term insurance premiums early in life. The cost comparison with Regular Pay really depends on the specific type of plan, insurer, and payment term you choose. So, before you jump to a conclusion or make a decision, get your financial advisor to do an NPV calculation for all your options and choose the best option that fits all your requirements. 

If you have any further questions related to regular pay or limited pay term insurance, you can post them on the Beshak Insurance Forum and get answers from insurance experts.