"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." This simple explanation by P Nandagopal, CEO, IndiaFirst Life Insurance, quite essentially sums the essence of a limited premium plan.
A limited premium payment plan is a plan where you pay the premium for a shorter span of time and enjoy the benefits of an insurance cover for a long time. There are of course some clauses associated with it, which we shall discuss in detail, but overall the plan is very useful for people who like being relieved from the commitments of paying insurance premiums for long time periods.
The premium that is paid, however, is higher than the premium paid in regular insurance policies.
Types of limited premium payment plans:
1. Limited premium ULIPs
Unit Linked Insurance Plans or ULIPS are available with limited premium payment plans too. These policies are similar to the single premium insurance plans. What happens here is that the premium that is normally expected to be paid in 15 years is compressed into a 5 year period. Many insurance companies offer nothing but limited premium payment plans in an attempt to avoid confusion among customers who are interested only in such plans. It makes it easier for the clients as well as the agents.
2. ULIPS with a NAV Guarantee
NAV guarantee ULIPS are very popular. In such policies, not only do you pay the premium for a limited period of time, you also are assured of the best net asset value, or NAV received on the funds for a period of about 7 years. Sometimes the NAV is also pre-decided, giving the policy holders additional assurance. The payment of premium is limited to a shorter time span as the insurers seek to narrow down the calculation range for the highest NAV.
3. Endowment Plans
Along with ULIPS, endowment plans are also available with limited premium payment options. Here, the policyholder can select a premium payment term between 5 to 25 years. These plans are available for 15, 20 and 25 years. Limited premium payment endowment plans can be both ‘with-profit' and ‘without-profit'.
Points to remember before buying a limited premium payment plan
Affordability - As mentioned earlier, the premiums are higher for limited premium payment plans. So before you buy such a plan, make sure you can afford the higher costs.
Tax calculations - In a limited premium payment plan, you end up paying a higher premium annually and this may or may not exceed 20% of the sum assured. If it does exceed, under Section 80C, the deduction will remain fixed at 20% of the sum assured.
Irregular income patterns - Many people, who suddenly witness a sharp rise in their incomes, opt for limited premium payment plans. For instance, a techie who has been posted in the US for 5 years may choose to finish paying off the premiums while he earns in dollars. Businesspersons doing well in the business can also opt for a limited premium payment plan.
Industry expert TR Ramachandran says," There are insurance plans in the market that offer you the option of limited premium payment term. You can opt for any such plan and choose to pay premium for a term of your choice." His words quite aptly sum up the options and flexibilities of the limited premium payment plan. Go for it if you have the resources in place and want to enjoy the benefits of an insurance cover without being burdened with a prolonged premium payment cycle.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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