Downside of Limited Premium | Factors to Consider for Limited Pay Insurance

by Priyadarshini 3 May 2023

This blog tells you some factors you should consider before going for a limited premium payment term for your insurance policies. Read about the downside of limited premium payment term.

The Downside of Limited Premium Payment Term

In terms of dollars, it is less affordable

When you choose a shorter payment tenure, you pay more per month in absolute dollars than if you spread the payment over the entire policy term. This higher monthly premium amount may be financially burdensome, especially if it consumes a significant portion of your take-home pay. It may also have consequences such as delaying the accumulation of your emergency fund or not having spare cash to invest. This is similar to other financial decisions that require a specific payment period.

Set your payment schedule upfront

You must choose the premium payment term at the outset of the application process. This means that you must make your decision today, without knowing what the future may hold. Unexpected circumstances, such as a layoff, health problems, or the birth of a child, could cause monthly expenses to spiral out of control. Being committed to the premium payment gives you a little leeway in how you spend your money. It may even prevent you from paying your premiums during these years. However, some insurance plans provide benefits that act as fail-safe in such a scenario, such as partial withdrawals, policy loans, and premium holidays.

The opportunity cost of previous years’ premiums

On the other hand, there is an opportunity cost to choosing limited premium payment terms. Paying more during each insurance payment may allow you to finish paying sooner; however, if your premiums were spread out over a longer timeframe with lower premiums for each payment, you may have more cash on hand to invest. The extra money you spent on premiums could have gone into an investment portfolio in your early years, compounded over time, and yielded higher returns.

The Downside of Limited Premium Payment Term

Should you opt for a premium payment term that is limited?

Many factors influence the decision to choose a limited premium payment term. There are also non-monetary considerations to consider, such as peace of mind. Here are some considerations and questions to ask yourself to help you make a decision:

  • Can you afford to pay the premiums over a shorter period of time?
  • Do you make enough money to comfortably pay this premium in the coming years?
  • What is your current financial situation?
  • Have you started an emergency fund?
  • Do you have enough cash on hand to cover these payments, especially in the coming years?

What are your future plans for your career? Do you intend to work for the majority of your life, or do you intend to have a shorter career and retire early? You might think about paying for some of these plans when you have a steady income or when you earn more.

What is your personal choice?

Is it peace of mind knowing that you have paid for your coverage in your later years, or is it the ability to invest these extra dollars now? This ultimately comes down to your financial objectives. Unlike a limited-pay insurance plan, paying premiums for the entire duration of a plan may require you to continue paying even after you retire. If your idea of retirement is to sit back and relax while enjoying the fruits of your labour, a limited premium payment term may be the best option.

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