Limited Pay vs Regular Pay Term Insurance

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• Introduction
• What is Regular Pay?
• What is Limited Pay?
• Limited Pay Vs Regular Pay - Aggregate of money paid
• Limited Pay Vs Regular Pay - Inflation Adjusted
• Cost Factors: Which is better, Limited Pay or Regular Pay in Term Insurance?
• Summing Up

Introduction

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., how long you pay premiums for your term insurance).

Imagine your term insurance plan is until you’re 65 years old, so now, 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.

Talking about premiums, 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 the 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.

Today, we will decode Regular Pay and Limited Pay options in this article and help you decide which is better, limited pay or Regular Pay in Term Insurance.

But first, let's get into the basics-

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What is Regular Pay?

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.

What is Limited Pay?

Under the limited pay option, you can pay off all your premiums in larger instalments early in life, and you will enjoy worry-free coverage 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 understand this with an example-

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Limited Pay Vs Regular Pay - Aggregate of Money 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.

When you take these amounts at 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.

But you’re missing something here!

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Limited Pay Vs Regular Pay - Inflation Adjusted

There’s a concept 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 years 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.

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 actually costs 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 to do this is to have your financial advisor make a detailed calculation, compare options, and make the decision.

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Cost Factors: Which is better, Limited Pay or Regular Pay in Term Insurance?

The pros or cons of a Pay mode 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. So, 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 is a possibility that you might miss a premium payment. This could result in your policy getting lapsed, you'll lose your coverage, and your family will end up without a cover. With 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, have 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 on 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 MyInsureBuddy⭐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 MyInsureBuddy forum and get answers from insurance experts for free!

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