Limited pay Insurance plans: Pay Limited Premium, Get Maximum Benefits

The thought of paying premiums for a limited period, but enjoying the insurance cover for a long period is very appealing. Perhaps, that is why companies sell policies, especially unit linked insurance plans, or ULIPs, where the premium paying term is shorter for coverages that are comparable with regular policies.

After the Regulatory and Development Authority (IRDA) changed the guidelines last September to make Ulips long-term products, the minimum lock-in period has gone up to five years from three years.

Some Ulips — often termed limited pay Ulips — now offer a limited premium-payment period of around 5-7 years. There are also endowment plans that offer similar options.

The core benefit of a limited pay plan is the possibility of enjoying coverage and remaining invested for a longer period even if the payment commitment is for a shorter period. Insurance companies also have the higher possibility of enjoying greater persistency if the product is suitable to the premium-paying horizon of the policyholder.

ULIPS WITH LIMITED PAY OPTION

Policies with limited premium paying terms work along the lines of single-premium insurance plans. "The premium to be paid over a period of, say, 15 years is compressed into 5-7 years in the case of limited pay Ulips. Some companies offer products that come only with limited pay options. It is done to eliminate confusion and help distributors meet the needs of insurance-seekers whose profile suits such products.

But if you choose a limited pay option, the premiums will be higher than the regular pay version of the policies.

NAV-GUARANTEED ULIPS

A heavily promoted Ulip category, NAV-guaranteed policies typically specify a limited premium paying period and promise policyholders the highest NAV (net asset value) clocked by their funds over a period of say seven years. The guarantee could also be in the form of a pre-specified NAV assurance.

All guaranteed Ulips come with the caveat that the insured stays invested until maturity.

The premium-paying period is shorter as the company would want to narrow the range for calculating the highest NAV.

ENDOWMENT PLANS

Like Ulips, endowment plans, too, offer the limited pay options. Most companies offer plans where the insurance-seeker can choose a premium-paying term ranging from five years to 25 years.

GAUGING SUITABILITY

Premiums, as mentioned earlier, would be considerably higher when compared with regular premium pay plans. Therefore, the first factor that you need to consider is affordability.

The premium is not exactly equal to the regular premium that would be paid through the policy tenure. In the case of a limited premium Ulip, the premium will be a little more than for a regular premium plan. This is to ensure that the corpus available in the fund is higher.

After the premium payment is stopped, premium allocation charges will go out of the picture, but the administration and mortality charges will continue to be deducted from the fund.

The fund will continue participating in the market and will benefit from the remaining amount invested. Hence, the corpus should have enough funds to sustain future deductions and enjoy market participation. Policy-related charges also need to be factored in, as most policies front-load the charges in the initial years.

The tax aspect also needs to be take into consideration. Since the annual premium would be higher than for regular policies, you need to ascertain if it exceeds 20% of the sum assured (SA). In such a case, the deduction under section 80C will be restricted to 20% of the SA. Besides, if the premium breaches this limit in any year, the maturity proceeds will not be exempt from tax.

Such plans may mainly appeal to those with irregular sources of income. A businessman going through a purple patch may, for instance, wish to fulfil his premium commitments when the going is good and could opt for a limited pay plan. Similarly, a software professional who has been deputed abroad for a few years and is likely to earn higher than usual during this period may also consider such a plan.

Usually, those engaged in the technology sector or in the field of sports and entertainment, who may have less-than-regular cash flows, find this option suited to their needs.

Bear in mind, therefore, that while the prospect of paying for a short term and enjoying the protection and other benefits over the long term seems attractive, it may not necessarily be meant for you. It would make sense to ascertain the suitability of such a policy to your profile before taking a decision.

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