The shorter term only means you will pay a higher premium.

 

One big problem with endowment insurance plans is that they require a multi-year commitment. You have to pay the premium for the entire term of the policy or risk losing some of the benefits promised on maturity. However, some plans have a limited premium paying period. Even though the policy is for 20 years, the buyer will have to pay the premium for only 8-10 years.

The shorter premium paying term doesn't mean such policies are cheaper than normal insurance plans. The premium for limited payment policies is higher.For instance, if a 35-year-old female buys the Kotak Premier Endowment Plan, the premium for the 20-year regular payment policy will come to `31,000 per year. If she opts for the limited premium payment option that requires her to pay for only 10 years, the premium will be `50,209 per year.

To many people, the limited payment option might appear attractive since the total premium paid is lower by about `1 lakh. However, the buyer must also take into account that she is paying a higher amount. When you calculate the returns, the IRR (internal rate of return) for both options are almost the same. In fact, it is marginally higher in case of the regular payment plan.

WHO SHOULD BUY THEM?

Limited premium payment policies suit people who are unsure about their ability to pay the premium for the full term of the policy. These people want the life cover to continue for a longer time, but may not have surplus income to pay the premium in the later years. They are also ideal instruments for people who have a lumpy income, such as self-employed professionals, sportspersons, performance artistes or small businessmen.

Financial planners contend that other investments are more effective. Term plans give a bigger life cover, the PPF can give tax-free returns, while the ELSS funds can give higher returns.