Policy and premium payment lengths are two important but distinct features of term insurance. People often misunderstand these two words, which have the same meaning. Let us first define the two concepts.
Policy Term
The policy term, also known as policy tenure, is the length of time during which the policyholder is covered under the term plan. It is the term during which the insurance is in effect, assuming the premiums are paid on time. Every insurance firm provides a variety of policy terms ranging from minimal to maximum; the client chooses how long he wants the term insurance coverage to last.
Term of Premium Payment
The premium payment term is the time during which the policyholder is obligated to pay the premium; in other words, it is the term for premium payment. A policyholder may choose how and when to pay his premium. There are three possible insurance payment terms:
- The Single Premium
He may pay the whole premium amount in one lump payment in one instalment for the duration of the insurance.
- Term for Regular Premium Payment
The policy term is the same as the premium payment period.
- Premium Payment Term Restriction
The length of premium payments is shorter than the term of the insurance. The premiums are paid for a certain period of time, but the coverage lasts until the end of the policy term.
In both regular and limited premium payment periods, the policyholder may choose a regular frequency of payment such as monthly, quarterly, half-annually, or yearly.
Premium Payment Term vs. Policy Term
- The policy terms and premium payment periods are the most important elements to consider when purchasing a term insurance policy. However, although both reflect time in a term plan, they are vastly different.
- The policy term is the time during which the policy is active, while the premium payment term is the period during which premiums must be paid in order for the insurance to be active.
- The policy term is determined at the time of purchase, and the policy payment term is determined between the insurer and the insured. It might be the same length as the insurance term or it could be shorter.
Insurance Jargon That Everyone Knows
- Reintroduction – If a policy expires due to nonpayment of premiums, the insurance provider will give you the opportunity to renew it. This procedure of insurance renewal is known as reinstatement. Nonpayment of premium may result in a penalty, as well as an extra renewal price.
- Premium Renewal – It is the premium paid to the insurer by the policyholder to maintain or renew the benefits of the policy after the policy term has expired. If the insurance expires due to nonpayment of premiums, a renewal fee is levied to reactivate it.
- Period of Revival – It is the time after the grace period when a lapsed insurance may be reinstated. As a result, the term provided by the insurer to revive an expired policy is known as the revival period.
- Value of Surrender – If a policyholder cancels a policy before the end of the policy term, the money he receives from the insurer is known as the surrender value. A surrender fee is levied. The policyholder gets the policy’s savings component, in which the money accrued is given over as surrender value. There are no surrender costs if a policyholder pays the premiums on time for at least three years.
- Benefit of Premium Waiver – Under certain situations, insurance companies will forgo future premium payments. This is known as the premium waiver benefit, and it is available in the case of death, injury, or disability. The premium waiver provision is included in your policy at an extra fee by the insurance provider. Such a benefit is useful if an unexpected loss of income occurs as a result of an unpleasant incident.
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After you understand the insurance term and premium payment conditions, you must pick them intelligently to your advantage. To begin, always choose a policy term that extends at least until your retirement age. It should not be any less. Second, if you are a salaried individual, choose a regular premium payment term over a single premium payment term. Most insurers will inform you that a single premium is less expensive than several premiums. However, this is not the case. You gain tax breaks every year if you pay your premiums on time. So gather the information and make an educated decision.