Life insurance plans offer a number of unique features that can make the plan more convenient for you, but at the same time provide trade-offs. Here is limited and regular payment options under the premium payment term. Before going into the various premium payment options we should first look at the premium paying term. Here is what is limited pay life insurance.
Premium Paying Term or PPT
The premium paying term in a life insurance policy is the total number of years that you will pay premiums. This may be the same or less than the total policy term. For example, if you want to buy term life insurance for 30 years, your premium paying term can be 30 years or less. Here is the policy term of 30 years for term insurance plans.
Most life insurance policies offer three different premium payment terms:
What is limited pay life insurance ?
In a limited pay plan, the policyholder only pays the premium for a specific pre-agreed term. However, the insurance holder gets full coverage for the entire policy term, irrespective of the premium payment term. After the expiry of the exact payment term, the Life Assured is not liable to pay any amount due. In limited payout option, the term of the policy is longer than the premium paying term.
For example, X, age 40, buys a term plan for 20 years with a limited salary option. He hopes to retire at the age of 55 and therefore, wants to pay all dues in 10 years from now. In this case, X will be liable for premiums only till the age of 50 years, after which there is no need for any payment. However, the policy coverage will continue for a full 20 years.
What are the benefits of Limited Pay Term Insurance Plan?
A limited premium paying plan frees you from the financial burden of paying premiums for a longer period. With this term plan option you can choose a longer coverage term that continues even after you retire, so you know that you will not have to pay premiums post retirement. As you can opt for higher coverage tenure, you can also enjoy longer risk coverage and the plan becomes more relevant.
Premium payments cease within a short period
The primary benefit of the limited payment option is that it frees you from paying the premium for your term insurance plan for a longer period. You only have to pay the premium for a limited, pre-determined period of time, while your plan lasts longer. Thus, if properly planned, limited premium plans can help you pay your premiums within your active working life before retiring peacefully.
Minimizes the chances of policy lapse
Since premiums are payable for a limited period, you do not have to try to pay the premium on time for a longer period. The premium is paid within a shorter period, and your policy is less likely to expire. And when a premium expires, you can enjoy uninterrupted coverage under the plan without any default risk.
Improved tax benefit if Section 80C limit is not fully utilized
It makes sense that when you pay premiums for a limited period of time, the annual premium expense goes up. Since the premium cost is paid over a shorter period of time, limited premium plans have higher annual premiums than regular plans. This higher premium lets you maximize the deduction available under Section 80C of the Income Tax Act, which allows a deduction of up to Rs 1.5 lakh from the gross total income.
However, you can claim the maximum possible deduction under this section only if this limit does not already reach other tax saving expenses and the investments you have made.
Suitable for individuals with short career span
Due to the current work culture and independent work practices, there are many individuals whose careers are short or expect to earn only for a short period of time. These individuals may not be comfortable with the long-term premium commitments of a regular premium plan; Therefore limited premium payment is a great option to consider.
This will free them from long-term premium payment obligations and ensure that they are covered for a long time even if their income is volatile or limited.
Term insurance limited pay vs regular
Following is the direct comparison between limited pay and regular pay:
Limited pay term plan
- Defined and short premium-paying periods
- Comprehensive coverage despite limited premium time
- Less chance of policy lapse due to shorter disbursement time
- No loss on account of non-payment, as the policyholder can surrender the plan and receive an adjusted value.
- No complication of multi-year premium payment
- Financial burden focused on a specific period
- Premiums are adjusted to be paid over a period of time and hence, do not increase with age
- Possibility to save 55% in premiums due to advance payments
- Payments are due within a stipulated time and do not extend beyond retirement
- Limited payable amount helps policyholders to get the maximum coverage possible.
- Ability to Maximize Tax Benefits Under Section 80C of the Income Tax Act, 1961
Regular Pay Term Insurance Plan
- Long premium payments that cover the entire plan period
- Higher chances of policy lapse due to payment default
- Full coverage for the entire policy term
- No benefit is paid on termination of the policy due to evasion of premium
- Comparatively high complexity due to monthly, semi-annual or annual costs
- Financial burden spread over the entire policy period
- Premium increases with age
- No discounts or rewards earned for premiums paid
- Expenses can continue after retirement
- Regular amounts, increasing with age, limit coverage due to continued financial burden.
- Tax benefits are divided over years and offer only limited deductions
A limited pay plan is suitable for individuals who have the following conditions:
A limited career span – sportsperson, actor, etc.
Fluctuations in monetary conditions – people working on commissions, bonuses etc.
Flexible Income – Self-employed individuals.
Unexpected work environment – Army personnel.
Imminent retirement in a few years
Requires complex plans with convenient payments.
Which premium paying option is best?
As mentioned earlier you may want to continue your life insurance after your retirement. This is useful if you have debt, dependent family members to take care of in the post-retirement period. In such a situation, the option of salary till retirement is the best. In what is limited pay life insurance.
However, if you are self-employed and have cyclical income, you will be in a better position with limited or single premium life cover. Even in the case of investment life plans like ULIPs, you can choose the limited payment option so that your payment obligation is only for a short period.
However, you can continue to invest any amount in the ULIP plan during the entire policy term. After your limited premium payment period ends, you can invest in the plan as per your convenience.
Simply, ensure that your investment in any financial year does not exceed 10% of the base life cover of any life insurance plan. If this happens, you may lose tax benefits on the policy under both Section 80C for the premium invested and Section 10(10D) for the maturity value.
FAQ about what is limited pay life insurance
What is an example of a limited pay life policy?
Limited pay life policies, such as LP65 and 20-pay life, are variations of whole life or straight life. … However, the term has no cash value, hence the answer is Whole Life, which is the cheapest type of permanent insurance and must be cash value after the third policy year.
How long does the coverage on a limited pay life policy normally last?
The short answer to how long coverage usually lasts on a limited pay life policy is usually up to 100 years of age or until death. However, there is a more granular version of it. Insurers have been raising the maximum age of life insurance from 100 to 120 over the last several years.
What are the disadvantages of whole life insurance?
Like all insurance products, whole life insurance has its disadvantages: it is expensive. Since permanent policies offer lifetime coverage, they come with a significantly higher price tag. The cost of whole life is usually 5 to 10 times higher than that of life insurance.
What is a Limited Death Benefit?
This type of universal life insurance policy can create a guaranteed death benefit after paying a certain number of required premiums. Once the policy owner has completed the required number of premium payments, the policy cannot be canceled by anyone other than the policyholder.
Why You Should Never Buy Whole Life Insurance?
Some PolicyGenius says that whole life insurance can cost you six to 10 times more than a comparable term policy. This greatly increases the likelihood that you will not be able to bear your premium at some point. If this happens, you may have no choice but to give up your coverage, which will make your loved ones vulnerable
This is all about what is limited pay life insurance? Thanks for reading.
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