Who Should Choose The Limited Pay Option In Term Insurance?
Normally, when people purchase a term insurance plan, they are required to pay the premiums until the very end of the policy term. This means - say if Alia takes a term insurance policy for a duration of 50 years & chooses the regular pay option, she'll have to continue paying the premiums for the next 50 years to keep her policy active.
Now, what if Alia is unsure about her ability to pay the premiums until the very end of the policy term? Maybe she plans to take a career break or thinks she'll have an uneven income in the future or plans to retire early? Is there a way she can pay her premiums early while she is able to, and then enjoy the cover for the remaining duration?
Well, she can - by choosing the limited pay option while buying the term insurance policy.
What Is Limited Pay In Term Insurance?
Limited pay is a premium payment option that allows you to finish paying off all your premiums speedily in larger and faster instalments and get the payment liability off your chest quickly. Regardless of the duration in which you complete your premium payments, you can retain your term insurance cover until the end of the policy term.
How Is Limited Pay Different From Other Premium Payment Options?
Besides limited pay, most term insurance policies offer two more premium payment options - single pay and regular pay.
- In single pay, you need to pay the premium only once, i.e., at policy inception.
- In regular pay, you need to pay the premiums until the end of the policy term.
So, the limited pay term insurance option can be considered to be a middle path between regular and single payment options.
Also, unlike regular pay, where your premium payment term is the same as your policy term, if you choose limited pay, your premium payment term will always be lesser than your policy term. Just as the premium payment term will differ under regular and limited pay options, the premiums you must pay every year will differ too.
Suppose Harshal and Rahul both are 30-year-old non-smokers. They buy a term insurance plan with a sum assured of INR 1 Crore. They choose a policy period of 30 years and select the lump sum claim payout option.
- Rahul chooses to pay the premiums regularly. So, in his case, the premium payment term will be 30 years, equal to the policy duration of 30 years. And, the premium he will need to pay to the insurer every year is INR 12,407 (with tax).
- Harshal chooses the limited pay option and plans to finish paying the premiums in the next 10 years. This means, his premium payment term will be 10 years, which is less than your policy period of 30 years. He will have to pay an annual premium of INR 21,652 to the insurer (with tax).
So, as you can see, the yearly premiums payable under both regular and limited options can vary significantly. The shorter premium payment term under limited pay does not imply that you pay less premiums.
Please note that the premiums in the above example are for Max Life’s Smart Secure Plus Plan, as of 26th September 2022.
Besides the cost factor, there are some other points of difference between regular and limited pay options. Let’s quickly go through them.
A Quick Comparison Between Regular Pay And Limited Pay
Premium paying duration
You’ll have to pay the premiums until the very end of the policy term.
You can finish paying off all your premiums in a shorter duration.
Payment beyond retirement
If you buy a long-term policy, you might have to pay the premiums even after you retire.
This means that you’ll need to have some source of income post-retirement.
You’ll finish paying all your premiums early in life, and most probably before you retire.
So, you don’t have to worry about having an income post-retirement.
Possibility of policy getting lapsed due to missed premiums
There are higher chances of you missing a premium payment, and hence, higher possibilities of the policy lapsing.
There are fewer possibilities of policy lapsing as there are very few chances of you missing the premium payment.
So, these were some differences between regular and limited pay. Next, let’s look at the types of limited pay options available today - and who should opt for limited pay.
Types Of Limited Pay Options In Term Insurance
Here’s a list of some common types of limited pay options available with term insurance policies -
- 5 pay: If you choose this option, you can finish paying all the premiums of your term insurance policy in just 5 years.
- 7 pay: This is also a popular option available in term plans. Here, you have to pay premiums for only the first 7 years after taking term insurance.
- 10 pay: Here, you're required to complete all your premium payments in 10 years of purchasing the term insurance policy.
- 20 pay: Similar to the above three options, you can finish paying your term insurance premiums in 20 years with this option.
- Pay till 60: Here, you can complete all your premium payments till you reach the age of 60. For instance, you purchase a term insurance policy for a duration of 65 years at the age of 25 and choose the 'pay till 60' premium option. With this option, you can complete all the premium payments till you turn 60 and enjoy the cover for a longer period of time, i.e., until you turn 90.
- Rolling from 5 to (policy term minus 1 year): Rolling limited pay means you can choose the exact number of years you want to pay the premiums for. With this option, you can start paying the premiums after your policy completes the initial five years. And you can continue paying them up to one year before the end of the policy term. For instance, you buy a policy at the age of 25 for a duration of 50 years, i.e., until you reach the age of 75. Now, if you choose the rolling from 5 to (PT-1) option, you can pay the policy premiums anywhere between age 30 to age 74 (that is, the policy term of 75 years minus 1 year).
- Rolling from 5 to 40: Here too, you can select the exact number of years you want to pay the premiums for - after the first five years of purchasing the policy till your policy completes 40 years.
Who Is The Limited Pay Option Suitable For?
You should select the limited pay option if -
👉 You want to get the payment liability off your chest quickly
If you’re someone who wants to get the liability of paying the premiums off your chest quickly, you can select the limited pay option. You can finish paying the premiums early and continue enjoying the benefits of the term cover for the rest of the duration.
👉 You want to buy an ultra long-term policy
You should opt for limited pay if you’re planning to purchase a long or an ultra long-term policy that offers a cover for a duration of up to 80, 85, or even 99 years. The premiums paying duration of such plans will mostly be beyond your retirement age. With the limited pay premium option, you won’t have to carry the financial burden of paying premiums into your post-retirement life.
👉 You have a limited career span or unpredictable income
Limited pay is a suitable option for term life insurance for self employed professionals, sportspeople, performance artists, businessmen, etc. If you have an uncertain income or are unsure about your ability to pay the premiums for the full policy duration because you may or may not have a surplus income in the future, you should opt for the limited pay option with term insurance.
That is all from our side. If you have any further questions related to limited pay term insurance, you can post them on the Beshak Insurance Forum & get answers from insurance experts!
- There are 3 premium payment models in term insurance -
- Single pay, where you need to pay the premium only once.
- Limited pay, where you need to pay premiums for a limited number of years.
- Regular pay, where you need to pay the premiums throughout the policy period.
- The limited pay option can be considered to be a middle path between regular and single payment options.
- The premium payment duration under limited pay is shorter than that of regular pay. However, the shorter premium payment duration does not mean you pay less premiums under limited pay.
- 5-pay, 7-pay, 10-pay, 20-pay, pay till 60, rolling from 5 to (PT-1), and rolling from 5 to 40 are some of the limited pay options you can choose with your term plan.
- You should opt for a limited pay policy if you -
- Want to get the payment liability off your chest quickly.
- Plan to buy a long or ultra long-term cover.
- Have a short career span.
- Expect an unstable, unpredictable income in the future.
Aakansha is a Content Ideator and Writer at Beshak. With her easy-to-understand content, she makes insurance simple for everyone. She comes with a strong background in finance and commerce and wants to help families make positive insurance decisions that are good for a lifetime.