Limited premium paying insurance plans ideal for self-employed

One big problem with endowment insurance plans is that they require a multiyear commitment. You have to pay the premium for the entire term of the policy or risk losing some of the benefits promised on maturity. However, some plans have a limited premium paying period. Even though the policy is for 20 years, the buyer will have to pay the premium for only 810 years. Several companies, including the LIC, PNB Metlife, TataAIA Life, BhartiAXA Life and Kotak Life are offering limited premium paying options in their endowment policies and other life insurance plans. The obvious advantage for the buyer is that he doesn’t need to pay the premium for the entire term. However, this doesn’t mean that such policies are cheaper than normal insurance plans. The shorter term only means a higher premium. For instance, if a 35yearold female buys the Kotak Premier Endowment Plan, the premium for the 20year regular payment policy will come to Rs 31,000 per year. If she opts for the limited premium payment option that requires her to pay for only 10 years, the premium will be Rs 50,209 per year. To many people, the limited payment option might appear attractive since the total premium paid is lower by about Rs 1 lakh. But the buyer must also take into account that she is paying a higher amount. When you calculate the returns, the IRR (internal rate of return) for both options are almost the same. In fact, it is marginally higher in case of the regular payment plan.

Who Should Buy them?

Limited premium payment policies tread the middle path between regular payment plans and single premium policies. They suit people who are unsure about their ability to pay the premium for the full term of the policy. These people want the life cover to continue for a longer time, but may not have surplus income to pay the premium in the later years. They are also ideal instruments for people who have lumpy income, such as selfemployed professionals, sportspersons, performance artistes or small businessmen. They can pay while they have a good income without having to worry about premiums
after some years.

Watch Out for

Though limited premium paying options are available in other insurance policies as well, they are mostly used in endowment plans. Endowment plans offer very low returns in the range of 56%
as they primarily invest in secure debt instruments. Financial planners contend that the triple objectives that insurance plans claim to serve can be fulfilled by other investments more effectively. Term plans can give a bigger life cover at lower price. PPF can give taxfree returns and ELSS funds can give higher returns. 

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