Policy and premium payment terms are two essential but completely different aspects of term insurance. Often people confuse these two terms with having the same meaning. Let us first know what the two terms mean.
Policy term is the period of time for which the policyholder is covered under the term plan, also called policy tenure. It is the period through which policy is in force, provided the premiums are duly paid. Every insurance company offers a range of policy terms from minimum to maximum, the policyholder decides how long he wants the term insurance coverage.
Premium Payment Term
Premium payment term is the period for which the policyholder is required to pay the premium; in other words, it is the term for payment of premiums. A policyholder can decide how and when he wants to pay the premium. There can be three types of policy payment terms;
He can pay the entire premium amount as a lump sum in one installment at once for the coverage till the end of the policy.
Regular Premium Payment Term
The premium payment term is equal to the policy term.
Limited Premium Payment Term
Premium payment term is shorter than the policy term. The premiums are paid for a limited time, but the coverage continues till the policy term.
The policyholder can choose a regular frequency of payment such as monthly, quarterly, half-yearly or yearly in both regular and limited premium payment terms.
Policy Term Vs Premium Payment Term
- Policy terms and premium payment terms are the foremost factors to consider while buying a term insurance plan. However, both represent time in a term plan but are considerably different.
- The policy term is the period for which the policy remains active, whereas the premium payment term is the period till which premiums are to be paid so that policy is active.
- The policy term is decided at the time of purchase of the policy, and the policy payment term depends on the insurer and the insured. It may be equal to the policy term or may be shorter than the policy term.
Common Jargon Related To The Term Insurance
If a policy lapses due to non-payment of premiums, the insurance company provides an option to renew the policy. This process of renewal of policy is called reinstatement. A penalty may be charged for non-payment of premium, and an additional renewal fee is also applicable.
Renewal Premium -
It is the premium that the policyholder pays to the insurer to continue or renew the benefits of the policy after the policy term is completed. In case the policy lapses due to non-payment of premium, a renewal premium is charged to reinstate the policy.
Revival Period -
It is the period after the grace period within which a lapsed policy can be reactivated. Hence the period offered by the insurance to revive the expired policy is called the revival period.
Surrender Value -
If a policyholder discontinues a policy before the policy term, the amount he gets from the insurer is the surrender value. There is a surrender fee charged. The policyholder receives the savings component of the policy in which whatever the amount accumulated is handed over as surrender value. No surrender fees are charged if a policyholder pays the premium for a minimum of 3 years without default.
Premium Waiver benefit -
Under special conditions, the insurance companies waive off future premium payments. This benefit is called premium waiver benefit and is provided in the event of death, accident or disability. The insurance company includes the premium waiver clause in your policy at an additional cost. Such a benefit is helpful if there is an unexpected loss of income due to an unfortunate event.
After understanding the policy term and premium payment terms, it is also essential to choose them wisely to your benefit. Firstly always choose a policy term at least till your retirement age. It should not be less than that. Secondly, if you are a salaried person prefer a regular premium payment term rather than a single premium payment term. Most insurers will tell you that a single premium is cheaper than regular premiums. But this is not the case. With regular premiums, you get tax benefits every year. So know the facts and make an informed choice.