Key Differences of Policy Term and Premium Paying Term

Being careful and well-informed is vital in financial planning. For that, understanding how a life insurance policy works is the key part of this. When you know about available options and how they work, you can make informed decisions to achieve your financial goals. 

Two important terms of life insurance are the policy term and the premium paying term. These terms sound similar, but they’re different. Each affects the policyholder and their beneficiaries. 

In this blog, let’s understand these terms clearly and show how to choose them based on your financial situation. 

What is a Policy Term?

A policy term is the length of time for which an insurance policy stays active. For example, if a 40-year policy term will provide 40 years of coverage. If something happens to the insurer during the tenure, the family gets the policy amount. 

What is Premium Paying Term?

The premium paying term is a period during which you pay premiums in your insurance policy. It’s mandatory to pay premiums to keep the policy active. For example, if the policy lasts 40 years and you pay for 20 years, then the paying term is 20 years. 

How does policy term affect life insurance benefits? 

The policy term plays a major role in determining the life insurance benefits. It defines the duration for which life insurance remains active. If the insured dies during the policy's tenure, the family receives death benefits. However, in pure term insurance, no benefit is paid if the insured outlives the policy. Choosing the right policy is crucial. It affects the level of financial protection for your family and the cost of the premium. 

Differences Between Policy Term and Premium Paying Term

Knowing the difference between policy terms and premium-paying terms helps you choose the right one. It helps in making informed decisions that align with your financial goals. Here are some major differences. 

Examples, 

Duration of Coverage 

Policy Term: Upon choosing 20-year policy term, your family gets 20 years of coverage. If the insured passes away during the policy, the nominees receive the death benefit. 

Premium Paying Term: If the premium paying term is 10 years, you pay the premium only for 10 years. Your coverage continues for the full 20 years. After the premium paying term is over, the plan provides benefits. No further premiums are required. In this case, the insurer uses the money saved in the plan to provide coverage. 

Financial Implications

Policy Term: A 30-year policy term ensures your family gets 30 years of coverage. This long coverage provides financial security during important stages of life. 

Premium Paying Term: The premium paying term indicates the period during which premiums must be paid. A shorter term, like 15 years, can reduce your financial burden. If you want to grow funds along with insurance, some plans invest your premiums in the market. Paying premiums can increase the total amount at the end of the policy term. 

Flexibility 

Policy Term: A 20-year policy means your family is financially secure for 20 years. If you pass away during the policy, your beneficiaries will get death benefits for financial support. 

Premium Term: For a premium paying term of 10 years, you will pay the premium for the full 10-year term. Your coverage continues for 20 years. Once the premium paying term ends, no further payouts are required. Still, your beneficiaries stay protected until the policy term ends. This gives peace of mind without any financial commitments. 

For instance, Shriram Life Savings Plan safeguards your family while creating a strong financial corpus. 

What are the Pros and Cons of Long and Short Terms in Policy?

From premium costs to coverage length, short and long-term policies affect your financial planning. Let’s explore the benefits and drawbacks of each policies. 

Pros of Long Policy Term 

• Gives coverage for many years, like 20 to 30 years 
• Provides long-term financial security for the family
• Suitable for long-term financial goals like children’s education

Cons of Long Policy Term

• Premiums are higher than those of a short policy term
• You pay for years, even if your needs change

Pros of Short Policy Term

• Premiums are lower, making it more affordable
• Perfect for short-term financial goals like paying off loans 
• Flexible if you need coverage for a specific period. 

Cons of Short Policy Term 

• Coverage ends soon, long-term protection is limited 
• If you outlive the policy term, no benefits are paid (pure term insurance)
• Requires renewal later at a high premium if coverage is required

Factors to Consider in Selecting Policy Term and Premium Paying Term

When selecting a life insurance policy, consider your financial objectives. Here are some factors, 

Policy Term

• Financial Goals: Decide if you want to support your family or build cash value for the future. Having clear financial goals helps to choose the right plan. 
• Age: Younger people often get benefits from longer policies. Older people prefer shorter terms based on their remaining life. 
• Family Needs: If you have dependents, select a policy term that is long enough to support them. 

Premium Paying Term

• Affordability: Select a premium paying term that falls within your capacity to pay. 
• Investment Strategy: If the policy is an investment, ensure the premium term aligns with your financial goals. Longer policies help some policies grow. 
• Flexibility: Look out for polices with flexible payments

Scenario 1 - Young Policyholder Radha 

Radha is in her early 30s and wants life insurance to protect her children. She chooses a 20-year policy term, which ensures coverage until her early 50s. For her premium paying term, she opts for 10 years. She is paying during her productive working years. This way, she secures her family’s financial future during the crucial period of child rearing. Even after she stops paying premiums, the coverage runs until age 50. Her dependents will receive a death benefit if needed.

Planning your policy term and premium payments should match your needs and life stage. 

Scenario 2 - Older Policyholder Murali 

Murali is 40 with a steady income. He wants insurance to support his family and retirement plans. He chooses a 30-year policy term with a matching 30-year premium paying term. This long-term plan gives financial safety for his family and also accumulates savings for retirement. By spreading premium payments over 30 years, he can manage his budget while building a retirement corpus. This strategy ensures his family is secure after his death. Also, he has funds to support his post-retirement plan. 

Selecting the right plan depends on your financial goals, age, and family responsibilities. Planning according to your life stage ensures both protection and savings. 

Key Takeaways for Smart Insurance Planning

Understanding the difference between policy term and premium paying term helps you make informed decisions. It allows you to recognise the right plan that tailors to your needs. With Shriram Life Insurance, plan today to secure your financial tomorrow. 

Disclaimer: This information provided is intended for general informational purposes only. For personalised recommendations, please consult a certified insurance professional.