Premium paying term vs. payout term: How are they connected?

  • Life Insurance

Before you buy a life insurance plan, there are many choices that you'll have to make. You need to choose the sum assured, the policy term, the premium payment mode, the premium payment term, and the add-on riders, if any.

But the choices don't end there. Depending on the type of life insurance policy you want to purchase, there are other parameters too that you will have to decide on before you buy your life cover.

For example, if you are purchasing a ULIP, you need to choose the funds that you want to invest in through your life insurance policy. Or, if you are going to buy a retirement plan, you will have to customize your annuity payouts according to your needs.

And in the case of income plans, you need to select the right payout term. Here's where many buyers may be confused, because the 'payout term' sounds a lot like the 'premium paying term.' But the two are quite different. Different, yet connected.

Let's first take a look at what they are and how they differ.

What is the premium paying term?

The premium paying term or PPT is simply the period over which you need to pay the premiums for your life cover. For some policies, the premium is charged as a one-time lump sum payment. These are known as single premium policies, and there is no long-term premium payment term here.

However, in life insurance policies that charge premiums periodically, you need to choose the premium paying term. Depending on the policy you choose, there are two kinds of premium paying terms available.

  • Regular premium paying term
  • Limited premium paying term

Regular premium paying term

In a regular PPT, you will need to pay the premiums throughout the policy term. In other words, the premium paying term is equal to the policy term. So, for instance, if you purchase a regular premium plan with a tenure of 20 years, you will need to pay your premiums throughout those 20 years.

The frequency of payment is customizable, and most life covers allow you to choose from different payment modes like monthly, quarterly, semi-annual or annual.

Limited premium paying term

In a limited premium payment plan, you do not need to pay premiums throughout the policy term. The premium paying term is shorter than the policy term. For example, say you purchase a limited premium plan with a tenure of 20 years. In this case, you will need to pay your premiums for a shorter period, say 8 years or 10 years.

Most limited premium plans give you a choice of premium paying terms to choose from. And just like regular premium plans, you can choose the payment modes in limited premium plans too. The options are similar, namely monthly, quarterly, semi-annual or annual payment modes.

What is the payout term?

The payout term is a parameter that is relevant to some kinds of life insurance plans. More specifically, income plans come with a payout term. Simply put, this is just the period over which the income benefits under the plan are paid out to the policyholder.

Most income plans give you a variety of choices for the payout term or the payout period. So, before you buy a life insurance policy that offers guaranteed income, you need to choose these parameters according to your needs. You can even choose a longer payout term if you anticipate that you will need this regular income for a longer period.

In the ABSLI Assured Income Plus, for instance, you can choose from the following payout terms.

  • 20 years
  • 25 years
  • 30 years

And you can also customize the benefit payout frequency with options like annual, semi-annual, quarterly or monthly payouts.

How are the two different?

Policyholders and people shopping in the insurance market may often confuse these two terms. However, the premium paying term and the payout term are very different from one another. Let's summarize the key differences to give you better clarity.

Premium paying term

Payout term

This is the period over which the premiums are paid by the policyholder.

This is the period over which the insurer pays out the benefits to the policyholder.

This is a common feature in all life insurance policies.

The payout term is only applicable to those policies that offer periodic payouts instead of a lump sum amount.

The premium paying term precedes the payout term.

The payout term follows the premium paying term.


How are the two connected?

For all of their differences, the premium paying term and the benefit payout term are also connected to each other. Here's how.

The payout term generally starts only after the premium paying term ends. So, in order to receive the payouts, the policyholder must survive the premium paying term and pay the premiums on time.

For instance, say you purchase the ABSLI Assured Income Plus. Your policy comes with the following particulars:

  • Premium payment term: 6 years
  • Policy term: 7 years
  • Benefit payout term: 20 years

In this case, if you pay the premium for 6 years and survive the policy term of 7 years, you will receive the survival benefits guaranteed under the plan for 20 years.

Conclusion

The premium paying term and the payout term are both important aspects of a life cover. Making the right choice can help you maximize your benefits and minimize your costs. A shorter PPT, for instance, lowers the overall premium cost. And a longer payout term helps you receive income benefits long after you retire. So, make your choice smartly at the time of purchase.

Read next: WHY IT'S NOT EARLY TO BUY INSURANCE IN YOUR 20s

Don't want to pay premiums right up to your 60s? Why not buy your insurance plan earlier, in your 20s, and pay your premiums for a limited period instead? Plus, there are other reasons behind why your 20s are not too early to buy a life cover. Our blog outlines them all.

Read it here

PAY YOUR PREMIUMS FOR A SHORT PERIOD, AND GET PAYOUTS OVER A TERM THAT IS OVER TWICE AS LONG!

With the ABSLI Assured Income Plus plan, this is definitely possible. You only need to pay premiums for 6, 8 or 12 years, and you get to enjoy income benefits for 20, 25 or even 30 years!

That's not all. Aside from the combination of a short premium payment term and a longer benefit payout term, this plan also gives you loyalty additions and a host of other customizable rider benefits.

Get details on call

Disclaimer

ABSLI Assured Income Plus (UIN: 109N127V04) is a non-linked non-participating individual life insurance savings plan. GST and any other applicable taxes will be added (extra) to your premium and levied as per extant tax laws. An extra premium may be charged as per our then existing underwriting guidelines for substandard lives, smokers or people having hazardous occupations etc. For policies issued on minor life, the date of commencement of risk shall be the date of commencement of the policy. Where a policy is issued on a minor life, the policy will vest after attainment of majority of the Life Insured. Where the Life Insured (whether major or minor) and Proposer/Policyholder is different, on the death of the Proposer/Policyholder, his legal heirs, in accordance with the existing succession laws, will be considered as new Proposer/Policyholder. As there is no death benefit payable on the death of the Proposer/Policyholder, the policy status does not change, and the policy continues.
ADV/10/21-22/1416

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