Key Differences of Policy Term and Premium Paying Term

When it comes to financial planning, it is important to be prudent and well-informed. Understanding how a Life Insurance Policy works is a key part of this. When you know the options available and how each of those options works, you can make well-informed decisions to achieve a personalized financial protection plan.

Two important concepts in the life insurance domain are -  the policy term and premium paying term. Let us examine each in detail. Understanding what each of these means will aid in one’s understanding of how insurance policies work.  

Both the policy term and premium paying term, though reads similar, refer to two distinct components of a life insurance policy each carrying significant implications for both the policyholder and their beneficiaries.

In this blog, we will explore these terms in-depth, examining their fundamental differences, key factors to consider when making decisions about them, and scenarios in which they are particularly applicable to various financial situations. This comprehensive analysis aims to equip you with the knowledge necessary to plan your life insurance plans effectively.

What Is A Policy Term?

A policy term refers to the duration of the policy that is covered under the insurance policy. A insurance policy of 40 years will have a policy term extending to 40 years during which time, the insured’s family members will receive the compensation of the policy in case of an unfortunate event in the insured’s life.

What is a Premium Paying Term (PPT)?

Premium paying term refers to the period in your insurance policy in which you pay premiums to maintain your insurance coverage. Example, if a insurance policy extends to 40 years of which, the insured is expected to pay premiums until 20 years, then the premium paying term for that particular policy will be 20 years.

Differences Between Policy Term and Premium Paying Term

Understanding the difference between policy term and premium paying term can help you make informed decisions when choosing a Life Insurance Policy that aligns with your specific needs and financial goals. A few of the most important differences are put together below:

Examples

Duration of Coverage:

Policy Term- If you choose a 20-year policy term, then your dependents will be covered for that period of 20 years. If the unfortunate demise of the policyholder or life insured occurs within such a period, then the will beneficiaries receive the agreed-upon death benefit.

Premium Paying Term- However, if your premium paying term is 10 years, you will pay premiums for only 10 years, but your coverage will continue for the full 20 years. After the premium paying term is completed, the plan continues with the coverage and benefits and no further premiums need to be paid by the policyholder.

In such an instance, risk coverage provided by the insurer is typically paid for from within the accumulated funds within the plan.

Financial Implications:

Policy Term- A 30-year policy term ensures that your family will receive the death benefit for three decades. This extended coverage is particularly beneficial during critical life stages, such as raising children or paying off a mortgage, when financial obligations are at their peak.

Premium Paying Term- The premium paying term specifies the period during which you are required to make premium payments. A shorter premium paying term, such as a 15-year premium paying term, can significantly ease your current financial burden. If you are considering accumulation of funds or savings alongside the insurance protection, some plans where your premium amount is deployed in market linked investments, paying more years would obviously enhance the amount of corpus at the end of the policy term.

Flexibility:

Policy Term- If you choose a 20-year policy term, your dependents will be covered for the entire 20 years. Should you pass away within this period, your beneficiaries will receive the agreed-upon death benefit, providing them with financial security during a crucial time.

Premium Paying Term- However, if your premium paying term is 10 years, you will pay premiums for only 10 years, while your coverage continues for the full 20 years. After the premium paying term ends, you won’t need to make any further payments, yet your beneficiaries will remain protected until the policy term expires, ensuring peace of mind without ongoing financial commitments.

The other significant difference is the flexibility offered in each term. While many policies provide flexible premium paying terms, once a policy term is selected, it is usually fixed.

Factors to Consider in Selecting Policy Term and Premium Paying Term

It is based on several considerations compatible with your current financial situation as well as future objectives. Among them, the following are a few important ones:

Policy Term

1. Financial Goals: What are you looking to achieve with your life insurance? Are you looking to provide financial assistance for your family in the event of an untimely death, or do you want to accumulate cash value for future use?
2. Age: In this again, age is a very important determinant of the term by which one should have a policy. Younger policyholders will benefit from long periods that cost them less, whereas older persons are most likely to opt for shorter terms based on their remaining life and obligations against them. This is not mandatory guideline but indicates usual patterns across different age groups of policy holders.
3. Family Needs: If you have dependents, you must choose a policy term that will be able to provide enough cover until they are independent and financially sound. A longer term will assure you peace of mind in these important years.

Premium Paying Term

1. Affordability: It is very important to choose a premium paying term that would fall within your capacity to pay.
2. Investment Strategy: If the purpose of purchasing a life insurance policy is for investment, then one should consider how the premium paying term fits into your overall investment strategy. Longer premium paying terms may allow growth in some types of policies.
3. Flexibility: Check if policies have flexible terms for premium payments. This flexibility may prove to be priceless when you think you might undergo a change in your financial circumstance that will affect your ability to pay premiums.

Common Scenarios

Scenario 1: Young Policyholder with Limited Pay Plan

Let's take the case of Radha, an individual who is in her early thirties. She chooses a 20-year policy term for her life insurance policy which means her coverage will extend until her early fifties. She further opts to pay her premiums for a 10-year premium paying term. That is precisely what she needs:

Duration of Insurance Coverage: Radha wants to ensure that her family, namely her children will get a financial benefit in case of her demise. This protection for 20 years is because by that time, they will likely be independent adults themselves and until that time, they will have the 20 years of protection through death benefit.

Premium Paying Term: For 10 years, she pays premiums during her known productive working years and will cease to do so around the time her expenses for her children’s education or life goals may be higher.  are inexpensive at this stage in crucial child-rearing years. It means that after this 10 year period, she will no longer pay the premium anymore, but her life is covered under life insurance until age 50 and her dependents will receive the death benefit payout until that time, in case of her death.

As you can see from the above example, the planning for the policy period and the premium payment term must be based on a proper understanding of one’s needs and in alignment with one’s life journey.

Scenario 2: Older Age Client with Long-Term Needs

Here’s another scenario of Murali, now at the age of 40, with a more permanent source of income and seeking insurance coverage that will provide him with more than enough when he is at an old age. Here the goals are dual - one part is financial protection from the risk of death during one’s productive years. The second part is to accumulate savings to support one’s living beyond the retirement age by using the savings aspect of a suitable life insurance plan. Murali therefore chooses a 30-year policy term coupled with a 30-year premium paying term. This is how it works for him:

Duration of Insurance Coverage: Murali wants long-term coverage for his family, especially as retirement age is approaching and the children are still financially dependent and his spouse depends on his income.

Premium Paying Term: Murali is committing to predictable premium payments extending over a 30 year span. It fits in well with his monthly budget and financial planning. Once this phase is over, he will have accumulated a good amount while having enjoyed the coverage. This way when he reaches retirement age and his income may drop he will have some funds to rely on.

In this way, Murali is able to plan for his family’s finances in the event of his death during his working years and also parallelly save towards his retirement years.

Conclusion

Understanding the distinction between the policy term and the premium paying term equips you with the knowledge necessary to make informed choices. Additionally, this understanding allows you to recognize the flexibility some plans provide, enabling you to tailor them to your specific needs. We hope this insight helps simplify your decision-making process concerning coverage, financial commitments, and your overall financial strategy.

Shriram Life Insurance provides wide range plans, including Retirement Plans, Savings Plans, Child Plans, and Protection Plans, designed to meet your financial needs.