Recently, a post from Mint, delved into the world of term insurance, comparing the classic plain vanilla option with Return of Premium and Zero Cost policies. Today, let’s unravel another alternative i.e., Limited Pay, that’s often aggressively pitched by insurance advisors and companies (even those speaking about providing unbiased insurance advice)
🔍 Limited Pay Option: A Closer Look
This option allows you to pay premiums for a short period, granting you extended life insurance coverage. Sounds appealing, right? For instance, a 30-year-old opting for a 35-year, 1 crore coverage can choose either annual premiums for the full term or, under the limited pay option, pay for the initial 10 years and enjoy coverage for the remaining 25 years without additional payments.
👉 Emotional Satisfaction vs. Financial Sense
While the limited pay option might provide emotional satisfaction by concluding payments swiftly, it may not align with financial wisdom. Let’s break it down with an example:
📊 Financial Analysis: Plain Vanilla vs. Limited Pay Option
Assuming a 30-year-old individual invests the 17K difference between plain vanilla and limited pay in equity index funds with a 10%* return for the first 10 years, and then withdraws 15K annually to cover the term insurance premium while letting the rest grow for the next 25 years, the accumulated amount would be nearly 15.8L (Please refer the image)
💡 The Numbers Speak Louder Than Words
As the numbers illustrate, sticking to a regular payment plain vanilla term insurance contract instead of opting for limited pay options proves financially advantageous.
👨💼 Our Recommendation: Financial Prudence
In the realm of insurance choices, it’s essential to make decisions that align with long-term financial goals. Our recommendation: opt for a traditional payment structure and harness the power of compounding for a more robust financial future.
*Mutual Fund Investments are subject to market risks. Please read the offer document before investing.
