Why ‘regular pay’ is better for life insurance premiums
Insurance industry promotes limited premium payments mode but it will cost you more ₹1,82,170
Policyholders are spoilt for choice when it comes to life insurance policies: First is the array of products on sale— they need to choose the policy that best suits them. And then there is the frequency of premium payment—monthly, quarterly, half-yearly or yearly. In case of life insurance policies, there is an additional choice to be made—regular or limited pay.
Regular pay is when the term of the policy and that of premium payment remain the same. It is limited pay when insurers allow you to limit the number of premiums to five, seven, 10 or 15 years when the policy term is longer, say, 30 or 40 years.
But is limited pay really better than regular premium payment? Most online insurance distribution platforms and insurance companies promote the limited payment option. For example, a term insurance policy of ₹1 crore coverage and a policy term of 30 years for a 30-year-old person envisages a premium of ₹11,138 under the regular payment mode, going by a leading insurance company’s website. If you opt for a limited payment option of 10 years, the premium will increase to ₹23,550.
If you were to calculate the total premium outgo in both options, this comes to ₹334,140 (the premium amount of ₹11,138 multiplied by the term of 30 years) in the regular mode and ₹233,500 (₹23,550 multiplied by 10 years) in the limited mode. Here, you find that the premium outgo in the limited option is 43% cheaper than that in the regular option. Sales executives of insurance companies will highlight this difference and most people thus tend to opt for the limited mode. However, here is the catch, and insurers will never tell you this. Understanding the concept of ‘time value of money’ is necessary to figure this out.
Time value of money
The value of a rupee today is worth more than what it would be in the future. This happens due to inflation which reduces the purchasing power of a rupee, and this is known as the time value of money. What you can buy with ₹100 today will not be the same in future. It means that if you pay upfront money for something that can be paid over time, you are in fact paying more now, say financial experts.
Abhishek Kumar, a registered investment adviser and founder of Sahaj Money, a financial planning firm, calculated the insurance premiums under regular and limited pay in accordance with the time value of money to bring out this reality. (see graphic)
As per this calculation, the value of the ₹11,138 annual premium will reduce to ₹10,508 in the second year and ₹9,913 in the third year, factoring in inflation at 6%. The actual premium outgo in that case in 30 years will come in at ₹1.62 lakh. In case of limited pay, ₹23,350 will become ₹22,028 in the second year and ₹20,781 in the third year. The total premium outgo in 10 years will come in at ₹1.82 lakh. This is 11% higher than what the total premium outgo is in the regular pay. It means in real terms, the regular payment option is 11% cheaper than the limited option.
“Paying insurance premium for a lesser number of years might look cheaper in absolute terms but, when adjusted for inflation, the net present value of total premium paid over 30 years would be less than what one would pay for 5,
7 or 10 years. This is because a single rupee in future would be worth less than the value of the rupee today, adjusted for inflation. Customers tend to only compare the absolute value,” says Kumar.
There is another reason why a regular pay option is more suitable than the limited one. When a person buys a life insurance policy, the intention is to protect the family’s financial goals. However, the policy becomes ineffective if you manage to secure all your financial goals during the policy period and nobody is dependent on your income. It is quite possible that by the time a 30-year-old policyholder turns 50 or 55, his children will start earning and there will be adequate pension for his spouse.
“If important goals such as children’s education and marriage have been achieved already with investments and savings, there is no point in continuing the term plan. In a regular option, you can stop paying premium to save on future premiums, but in the limited option, you have already paid the premiums for the entire policy term,” says Kumar.
To be sure, the policy period in single premium payment policies is usually 20 years. The single premium for a 30-year-old buying a term cover of ₹2 crore will be around ₹2.92 lakh. In a regular option, the premium will just be ₹14,579 per annum for 20 years. In real terms, the regular option will be 39% cheaper than the single premium payment mode.
“Some people opt for single premium payment mode to avail of the maximum exemption provided under Section 80C of the income tax Act, but there are better ways to do so. Upfront payment of premium to insurers is not a good idea,” highlights Kumar.
Between 1970 and 1978, my father acquired 420 shares of ITC Ltd, which have since grown to 173,880 shares due to corporate actions such as bonuses and share splits. My father died in 2005 and my brother in 2010, I am claiming ownership of the shares as per my father’s will, which names me as the beneficiary. Additionally, I do not currently possess the original share certificates. What is the procedure that I need to follow to claim these shares?
—Name withheld on request
Since your father and brother are deceased and you are the sole legal heir to these shares, you will have to undergo the procedure of transmission of shares. As the value of shares is substantial and your father had left a will in your favour. You will have to obtain the probate of will from the competent court. Probate is a legal process of establishing the authenticity of the will and giving legal recognition to the will.
You need to ensure that all the specific details of shares such as folio number, certificate number and distinctive number are mentioned in the probate.
Thereafter, you need to approach ITC with the probate certificate, requesting that the shares be transmitted to your name. Along with probate, you also need to provide affidavits and indemnity for transmission. Further you will also have to apply for duplicate issue of these shares as you are not in possession of all the original share certificates as on the date.
As for the issue of duplicate share certificates, you will first need to lodge a police complaint about the loss of the original shares and also need to give an advertisement to that effect in English and regional language newspapers.
You will also need to provide all your KYC (know your customer) documents such as PAN card and Aadhaar, besides details of relevant bank and demat accounts. Since the value of the aforementioned shares is substantial, the company may also insist on physical verification of your documents and your address. In that case a company official will visit your place and verify all your KYC documents in original before submitting a report to the company.
Once the company finds all these documents in order, it will issue the shares certificates in your favour after duplicate and transmission process.
However as per current rules, the company will not issue shares certificates to you in the physical format. It will issue you a letter of confirmation (LOC) in lieu of the original certificates.
You will need to submit the LOC along with demat request form to your depository participant (DP) for dematerialisation of these shares.
Vikash Kumar Jain is co-founder, Share Samadhan.
Regular pay is when the term of the policy and that of premium payment remain the same
Do you have a personal finance query? Send in your queries at
and get them answered by industry experts.