Life insurance is a long-term product, which needs you to pay premiums regularly. In such policies, you need to decide on two more things: the premium payment term and the frequency of payment.
We explain these two modes, but first start with learning a bit about single and regular premium policies.
From a premium payment perspective, there are two kinds of insurance policies: single premium policies and regular premium policies.
A single premium policy asks you to make an upfront payment. So that, even if you buy a policy for, say, 10 years, you would pay the premium in one shot.
On the other hand, with a regular premium policy you need to pay a fixed premium every year.
Under a regular premium policy you can choose to pay the premiums throughout the policy term or for a limited number of years.
Regular premium policies typically allow you to choose the period for payment. This is referred to as the premium payment term. So, even if you buy a policy for 15 years, you can choose to pay the premium for 10 years only, by choosing the premium payment term that suits you. The minimum premium payment term allowed, as per rules, is 5 years.
The premium payment term is crucial, as commissions of the agents as well as the surrender value that you get—in case of traditional insurance cum investment plans—are pegged to the premium payment term.
In terms of commissions, if you choose a premium payment term of 5 years, the maximum commission that your agent can get is 15% of the annual premium. On the other hand, if you choose a premium payment term of 12 year or more, the agent is entitled to the maximum commission of 35% in the first year.
In terms of surrender value, a traditional policy such as an endowment plan acquires a surrender value after two premium are paid, in case the premium payment term is 10 years or more. So, if you surrender your policy in the first year you get nothing back.
However, if you surrender the policy in the second year you get back at least 30% of the premium paid. But if the premium payment term is less than 10 years, then this surrender value is available only after three premiums have been paid.
Frequency of premium payment
After choosing the premium payment term, you also need to decide the frequency of the premium payment. Other than annual premium payments, insurance companies also allow you to pay the premiums bi-annually, quarterly and even monthly.
However, the more the number of instalments, more is the overall payment.
For instance, let’s pick a policy in which, under the monthly mode, the policyholder pays 0.0867 multiplied by the annualised premium. So, assuming that the annual premium for the policy is Rs1,000, under the monthly mode the policyholder will pay Rs86.70, which comes to a total of Rs1,040. This is because the insurer charges you extra for allowing you to pay the premiums in instalments.