Difference Between Policy Term And Premium Paying Term

The purchase of an insurance plan requires you to make many decisions. Of those, choosing the right sum assured, policy term, and premium paying term are some of the more important ones. These factors should be carefully thought out before you buy a life cover. Let’s understand how these differ from one another. 

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What is the difference between policy term & premium paying term?

The policy term and the premium paying term are vastly different aspects of a life insurance policy and should not be confused.

The policy term is the total duration of your life insurance coverage, while the premium paying term is the number of years for which the premiums have to be paid. The premium paying term can be equal to or less than the policy term. If premiums are not duly paid as per the chosen premium paying term and the frequency, the coverage shall cease before the end of the policy term.

Here’s a look at each of these terms in more detail.

What is the Policy Term?

Life insurance policies cover your life only for a specific period of time, except for whole life insurance plans. You can choose to remain covered for 5 years, 10 years, 20 years, and so on. This period is called the policy term. It is an important concept in term insurance because such policies only cover deaths that occur during the policy term and not after. No benefit shall be paid to the nominees of a term cover after the end of the policy term.

Endowment plans on the other hand offer maturity benefit to the policyholders should they survive the policy term.

In order to keep the policy active and the life cover in force throughout this period, you are required to pay premiums. This brings us to the premium payment term.

What is the Premium Paying Term?

Now, premiums are what you pay to keep the policy in force. The premium paying term is the period throughout which due premiums have to be paid. There are two variants to choose from -

  • Regular Premium Paying Term - If it is equal to the policy term, premiums are to be paid for the entire duration of the policy. This is known as regular premium payment. For instance, if the policy term is 20 years, premiums will have to be paid for 20 years.

  • Limited Premium Paying Term - The other scenario is when the premium paying term is less than the policy term. In such cases, you pay premiums for a limited period, but the life cover continues till the end of the policy term. For instance, you can choose a policy term of 20 years but pay premiums only for the first 10 years of it.

The frequency of premium payment in both cases can be monthly, quarterly, half-yearly, or yearly.

There is also a third variant viz. single premium payment which requires you to pay a lump sum premium amount for the entire period of coverage.

Conclusion

Remember to pick a longer policy term to ensure coverage for a longer time. If you are 20 years old and your policy term was for 20 years, you will only have protection till the age of 40. Buying a new plan at this age will incur higher premiums as the risk profile increases with age. Now that you have a good idea of the difference between policy term and premium paying term, you are in a good position to choose the best life insurance policy for yourself.

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