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Difference between Policy Term and Premium Paying Term

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Difference between Policy Term and Premium Paying Term
February 22, 2024

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When it comes to securing the financial future of your loved ones, term plans stand out as a simple and reliable choice. Although terms like "Policy Term" and "Premium Paying Term" may seem straightforward, their distinctions bear significance in shaping the nature and scope of your insurance coverage. Let us understand the difference between Policy Terms and Premium Paying Terms, shedding light on their roles and impact on your insurance journey.

What is a Policy term?

A term plan is a straightforward life insurance product designed to provide financial protection to your family in the event of your demise. The Policy Term essentially refers to the duration for which your insurance coverage remains in force. It represents the time frame during which you are entitled to the benefits outlined in your policy. Understanding the optimal Policy Term involves aligning it with your long-term financial goals and the intended purpose of the insurance. For example, if you purchase a life insurance policy with a Policy Term of 20 years, it means the coverage remains active for two decades from the policy's commencement.

What is the Premium Paying Term?

The Premium Paying Term (PPT) is a crucial element of this insurance, dictating the duration for which you need to pay the premiums. It specifically refers to the duration for which the policyholder is required to pay premiums. This period might be shorter, equal to, or (in rare cases) even longer than the Policy Term. It is a subset of the Policy Term and plays a significant role in determining the cost of the term plan and the duration of your financial commitment. The PPT directly influences the premium amount. Opting for a shorter PPT may result in higher premiums, while a longer PPT might spread the cost over a more extended period, making it more affordable.

What is the Difference between Policy Term & Premium Paying Term? 

Let us further explain and illustrate the difference between the two terms with an example.

Let's assume you’re 35 years old and looking for a term plan. You decide on a Policy Term of 30 years, providing coverage until you turn 65. Now, you face the decision of selecting an appropriate Premium Paying Term.

  • If you opt for a Premium Paying Term of 20 years, you will pay premiums regularly for 20 years, making the policy affordable during your working years. The coverage, however, continues for the full Policy Term of 30 years.

  • If you choose a Premium Paying Term of 10 years, you will pay higher premiums for a shorter duration. The coverage still extends for the entire Policy Term, but the financial burden is concentrated in the initial years.

Considerations and Best Practices:

  • Long-Term Financial Planning:

    Assess the duration for which you foresee needing financial protection, factoring in responsibilities like outstanding loan payments, children's education, or retirement. Assessing when you want the financial protection to be in place is vital. A well-matched Policy Term and PPT ensure your policy provides financial protection when it's most needed.

  • Balancing Premiums and Coverage:

    Strike a balance between an affordable Premium Paying Term and a Policy Term that adequately covers your anticipated needs. Evaluate your current financial capacity and consider how it might change over time. Choose a PPT that allows you to pay premiums comfortably throughout your earning years, ensuring financial stability.

  • Adaptability to Life Changes:

    Life is dynamic, and circumstances change. Opt for a Premium Paying Term that accommodates potential shifts in income, expenses, or financial priorities. Regularly review your policy to ensure it aligns with your current situation. Make adjustments as needed to stay in line with your objectives.

  • Review Policy Surrender Options:

    Thoroughly understand the policy surrender options. Having flexibility can be beneficial in case of changes in personal financial situation and/or the availability of better products in the market. Opt for a term insurance plan that provides reasonable surrender options, allowing you to adapt to changing financial needs.

  • Impact on Policy Premiums:

    Recognise that the Premium Paying Term affects the total premium amount. Shorter PPTs may result in higher annual premiums, while longer PPTs could offer more budget-friendly options. Compare premium rates for different PPTs and choose the one that suits your financial capacity without compromising on coverage.

In Summation

Comprehending the nuances between a Policy Term and a Premium Paying Term is vital for making informed decisions. Tailoring these terms to align with your financial goals, obligations, and capacity ensures a customised insurance plan that serves your needs effectively. Whether seeking extended coverage or a more condensed commitment, the key lies in striking a balance that blends perfectly with your unique financial needs. Remember, it's not just about paying premiums; it's about securing peace of mind for the years to come. 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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