Term insurance is the cheapest form of life insurance as it pays the insurance money only to the nominee in case of unfortunate demise of the life assured and nothing is payable if the life assured survives the policy term.
The primary aim of taking life insurance is to cover the risk of early death of the earning member of a family, so that the financially dependent members of the family may maintain the standard of living even after unfortunate early demise of the bread winner. So, the sum assured (SA) should be enough to replace the loss of future earnings after early death of the life insured.
Term insurance is the cheapest form of life insurance as it pays the insurance money only to the nominee in case of unfortunate demise of the life assured and nothing is payable if the life assured survives the policy term. As a result, it is feasible to take adequate term insurance cover by paying much less premium compared to endowment and other insurance plans that contain survival benefits also.
In simple term plans, insurance companies try to bring some variation by adding different options in premium payments, rider benefits etc that come with some extra premium.
Premium payment options include limited premium and single premium along with the traditional regular premium option. Another premium related option is ‘Return of Premium’ if the life assured survives the policy term, which is not related to premium payment option, but inflates the amount of premium compared to the simple term option.
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Here are the pros and cons of choosing the different premium paying options:
Death is certain, but the timing is uncertain. The doctrine of life insurance is based on the uncertainty in timing of death. Moreover, term insurance is considered best due to its low premium. As the aim is to cover the risk of early death, it’s better to pay lesser premium, because nobody knows if the life assured would survive the entire policy term or die after paying the first premium or after paying few installments. So, regular premium is undoubtedly the best suited option for the life assured.
However, the major cause of insurance claims getting declined is due to non-payment of premium on time, resulting into policies not in force at the time of death and hence claims become non-admissible. So, lower the premium paying term, lower would be the risk of policies getting lapsed.
There may be options of paying premium for the entire policy term in few years – say in 5 years or 10 years, or to pay premium few years less than the policy term – say 5 years less than the policy term or 10 years less than the policy term. Apart from minimising the chance of lapsation of policies due to non-payment of premium on time, policyholders may get a small part of premium back if they surrender their policies before completion of the policy term, while no surrender value is there in case of regular premium.
However, the principal aim of choosing term insurance cover is to minimise the premium, so there is no point in paying insurance companies in advance.
Although, there are surrender values are there in case premium is paid in one go, but the primary aim of paying an insurance company the entire amount in advance through single premium is to eliminate the chance of lapsation of the policy.
Unlike endowment insurance plans, there is no survival value in case of term insurance. As timing of death is also uncertain, there is no way to predict if there will be any return in the form of insurance claim or to calculate the rate beforehand, even if any claims arise during the policy term. So, apart from ensure that the policy remains in-force throughout the policy term, there is no rationale in choosing single premium or even limited premium.