Recently, my investment advisor recommended that I buy a term insurance cover of 2 Crores with a regular premium payment option spanning 25 years. I am currently 35 years old and need insurance coverage until I reach the age of 60.

While exploring the online purchase of term insurance, I discovered different premium payment term options,  5 years, 7 years, and 10 years and regular premium till age 60 i.e. 25 years.

To make an informed decision, I decided to calculate the premium amounts for a 2 Crores term insurance policy.

For a regular premium payment over 25 years, the annual cost would be Rs. 33,718.

Alternatively, for a limited premium payment term of 5 years, the yearly premium would amount to Rs. 1,20,916.

The limited premium payment terms of 7 years and 10 years would require annual payments of Rs. 95,872 and Rs. 63,411, respectively.

Considering these figures, if I choose the 5-year limited premium payment term, the total amount paid in premiums would be Rs. 6,04,580. Similarly, for the 7-year term, the total premium amount would be Rs. 6,71,104, and for the 10-year term, it would be Rs. 6,34,110. On the other hand, paying premiums for 25 years would result in a total payment of Rs. 8,42,950.

Given the lower premiums and the freedom from paying premiums for the next 25 years,  the question is why my investment advisor is recommending the regular premium payment option. Although I plan to address this concern with my advisor directly, I wanted to gather some feedback beforehand.

Sounds Familiar!

This situation seems to be confusing, as approximately 60% of my clients have raised similar questions. So, I decided to write an article on this topic to provide clarity on the topic.

What is limited premium payment in term insurance?

Suppose you purchase a  term insurance policy for a duration of 25 years. However, you are only required to pay the premium for a period of 10 years. Even though you stop paying the premium after 10 years, the insurance coverage continues for the entire 25-year term. This means you won’t have to make any further premium payments for the remaining 15 years, yet you’ll still enjoy the protection offered by the policy.

Now, let’s explore two potential scenarios if you are planning to choose a limited premium payment term option.

Death before limited premium payment term

Let’s consider a scenario where Ajay has purchased a term insurance cover of 2 Crores with a limited premium payment option of 5 years and a term of 25 years, as mentioned in the previous example. The annual premium amount for this plan would be Rs. 1,20,916.

Now, let’s imagine a situation where Ajay, unfortunately, passes away after 4 years. In this case, he would have paid a total of Rs. 4,83,664 in premiums. However, if he had opted for the regular premium payment option, he would have paid Rs. 1,34,872 in premiums over the same period. This results in a loss of Rs. 3,48,792 when compared to the regular premium payment option.

Similarly, if Ajay had chosen the premium payment term of 7 years, the loss would have been Rs. 2,48,616 in 4 years, and for the premium payment term of 10 years, the loss would have amounted to Rs. 1,82,183 in the same period.

These calculations assume that Ajay did not invest the differential amount anywhere. However, the potential savings would have been higher if he had invested that money in other instruments and earned returns from those investments.

This brings us to the second scenario, where we explore the additional amount Ajay could have saved if he had invested the differential amount and lived beyond the limited premium payment term.

Survival after limited premium payment term

Let’s take a look at the premium payment options for a term insurance policy:

If you choose to pay for 5 years, the total premium amount paid would be Rs. 6,04,580. On the other hand, if you pay for 25 years, the total premium amount paid would be Rs. 8,42,950. This indicates a difference of Rs. 2,38,370, which seems like a discount provided by the insurance company.

However, let’s dig deeper and determine if this is truly a discount or if it would be more beneficial to pay the regular premium and invest the differential amount. To evaluate this, I have prepared a table considering return assumptions of 8%, 10%, and 12%.

Year Regular Premium payment for 25 years Limited Premium payment for 5 years Difference in premium Returns at 8% Returns at 10% Returns at 12%
1 33718 120916 87198 ₹ 94,174 ₹ 95,918 ₹ 97,662
2 33718 120916 87198 ₹ 1,95,882 ₹ 2,01,427 ₹ 2,07,043
3 33718 120916 87198 ₹ 3,05,726 ₹ 3,17,488 ₹ 3,29,550
4 33718 120916 87198 ₹ 4,24,358 ₹ 4,45,155 ₹ 4,66,758
5 33718 120916 87198 ₹ 5,52,480 ₹ 5,85,588 ₹ 6,20,430
6 33718 -33718 ₹ 5,60,263 ₹ 6,07,057 ₹ 6,57,118
7 33718 -33718 ₹ 5,68,669 ₹ 6,30,673 ₹ 6,98,208
8 33718 -33718 ₹ 5,77,747 ₹ 6,56,650 ₹ 7,44,228
9 33718 -33718 ₹ 5,87,551 ₹ 6,85,225 ₹ 7,95,772
10 33718 -33718 ₹ 5,98,140 ₹ 7,16,658 ₹ 8,53,500
11 33718 -33718 ₹ 6,09,576 ₹ 7,51,234 ₹ 9,18,156
12 33718 -33718 ₹ 6,21,926 ₹ 7,89,268 ₹ 9,90,571
13 33718 -33718 ₹ 6,35,265 ₹ 8,31,105 ₹ 10,71,675
14 33718 -33718 ₹ 6,49,671 ₹ 8,77,125 ₹ 11,62,512
15 33718 -33718 ₹ 6,65,229 ₹ 9,27,748 ₹ 12,64,249
16 33718 -33718 ₹ 6,82,032 ₹ 9,83,433 ₹ 13,78,195
17 33718 -33718 ₹ 7,00,179 ₹ 10,44,686 ₹ 15,05,814
18 33718 -33718 ₹ 7,19,778 ₹ 11,12,065 ₹ 16,48,747
19 33718 -33718 ₹ 7,40,945 ₹ 11,86,182 ₹ 18,08,833
20 33718 -33718 ₹ 7,63,805 ₹ 12,67,710 ₹ 19,88,129
21 33718 -33718 ₹ 7,88,494 ₹ 13,57,392 ₹ 21,88,940
22 33718 -33718 ₹ 8,15,158 ₹ 14,56,041 ₹ 24,13,849
23 33718 -33718 ₹ 8,43,955 ₹ 15,64,555 ₹ 26,65,746
24 33718 -33718 ₹ 8,75,056 ₹ 16,83,921 ₹ 29,47,872
25 33718 -33718 ₹ 9,08,645 ₹ 18,15,223 ₹ 32,63,852

Upon analyzing the table, it becomes obvious that opting for the regular premium payment term consistently results in positive cash flow at the end of the tenure. This principle also applies when purchasing a policy until age 85 and paying the premium until age 60, or for 10, 15, or 20 years.

There is an exception to this rule for individuals with irregular cash flow, such as businessmen uncertain about their ability to pay premiums for the next 20-30 years. In such cases, it may be more prudent to opt for the limited premium payment term. The same can be true for individuals in risky professions who may wish to retire early but do not want to pay a premium after their retirement.

Points to remember:

In most cases, it is not advisable to opt for the limited premium payment option. It is generally more advantageous to choose the regular premium payment term.