For my first protection plan, I decided on term life insurance, which my financial adviser representative said was “the simplest protection product that gives affordable coverage for a specific period”. However, I wasn’t looking forward to being locked into paying premiums right up till I was 99 (when my chosen coverage would end). Then I was enlightened: there’s something called a limited premium payment term.  

Premium term – a key consideration when buying life insurance

Premium commitment period, or how long you’ll have to pay premiums, is a key consideration when choosing a life insurance plan. Picking a premium term (or duration) that aligns with your unique budget and financial situation – both now and in future – ensures you’ll be able to keep up with payments and stay insured. It’s a decision you should consider carefully.

There are different premium payment terms for life insurance. Perhaps most common is regular premium payment or “regular pay” for short. Less known is limited premium payment (“limited pay”). The first time I heard “limited” and “payment” in the same sentence, my ears pricked up because I was intrigued by the idea of an earlier “premium end date”, but there’s more to it than meets the eye.

In this article, I’ll cover what you need to know about a limited premium payment term in life insurance.

What is the limited pay option in term life insurance?

Why would someone consider limited pay?

Is limited pay a better premium term for you?

An example of how limited pay works in term life insurance

Can limited pay term life insurance help boost your legacy plans?

What is the limited pay option in term life insurance?

Certain term life insurance plans offer the flexibility to choose a premium payment term you’re most comfortable with. Aside from the standard regular pay, you may have the option of limited pay.

With limited pay term life insurance, you’ll pay premiums into your policy for a shorter period than what you’re covered for. This could be for a certain number of years or up to a certain age. For instance, a 40-year-old man may choose to pay premiums for only 10 years or until he turns 65 but be eligible for the policy benefits up to the age of 99.

Choosing limited pay is like frontloading your payments so you won’t have to keep making payments throughout your coverage duration. It significantly reduces the number of years for which you need to fund your policy.

In contrast, choosing regular pay means that premium payments are distributed across your entire coverage period, and you’ll have to make regular payments until your coverage term ends.

Why would someone consider limited pay?

Opting for limited pay term life insurance has its advantages. It can be a strategic choice if you have certain budget and financial planning priorities:

• Complete premium payments sooner

You’ll have one less financial commitment past a predetermined age or date. Most people opt to complete payments during their working years, so they won’t have to worry about funding their policy when they don’t have income from a job.

• Freedom to switch your focus to other goals, like legacy planning

With the long-term assurance that your family will be financially secure should you die, you can work on other financial goals, like building an inheritance for your family. The earlier you start accumulating and growing your legacy pot, the longer runway your money will have to multiply from compound interest.

• Liquidity when needs change or in the event of an emergency

Traditionally, a term life insurance plan will not give you any money if you decide to terminate it early, however, some limited pay term life insurance plans will. For example, they may give you back a certain amount of money if you no longer need coverage. This gives you the assurance that you’ll get some cash when your protection needs change and have liquidity during an emergency.

• Choose when your premium payment term ends

You may have a choice of five years, 10 years or up to 65 years, for instance. This gives you the flexibility to control when you’ll finally be free from paying premiums, which can work in your favour when it comes to budgeting.

• No coverage lapses

As long as you keep up with payments during your chosen premium term, you don’t have to worry about your policy lapsing – and consequently, you going uncovered – during your senior years should you forget to make premium payments (cognitive decline can start as early as one’s forties).

Is limited pay a better premium term for you?

While limited pay has its pros, there are cons, too. The higher premiums may be unaffordable during your early career years when your income may be lower and you may have many other big financial commitments such as a home loan. So, do ensure you have the financial bandwidth needed for this option, and consider speaking to a financial adviser representative for a financial portfolio analysis before committing to a product purchase. Keep in mind that pumping huge sums of money into your policy for a few years could also mean having to pass up potential investment opportunities during that period.

The bottom line is you have to weigh the pros and cons and consider your financial situation before choosing limited pay. It could work for you if you:

• are managing your other financial commitments comfortably and have access to the cash needed to fund the larger annual premiums
• prefer to complete payments earlier and focus on other financial plans like legacy planning
• plan to retire early and want to clear your dues before your income source closes (retiring by 45 is an attractive proposition for some millennials in Singapore)

An example of how limited pay works in term life insurance

There are a number of term life insurance plans in the market with a limited pay option, and each one has different benefits and features. Singlife has a limited pay option for its Singlife Elite Term II plan. The table below shows the key differences between Singlife Elite Term II’s regular pay and limited pay options.

Now, let’s use this plan to understand how limited pay works in term life insurance. In the illustration below, Victor, a Singlife Elite Term II (Limited Pay) life assured is covered for S$3 million until age 99 and chooses to pay premiums only until the age of 65, so he doesn’t have to pay premiums when he retires.

Additionally, he has two opportunities to enjoy cash benefits while he’s alive:

Opportunity 1: When he surrenders his policy

From the third policy year until the end of his coverage term, his policy acquires a surrender benefit, which is a percentage of his total paid-up premiums for the base plan. Should he surrender his policy at the age of 65 when his kids are already financially independent, he’ll receive S$470,801 in cash (80% of premiums paid for the base plan, excluding rider) and can use it as he wishes. For instance, he may buy property as legacy gifts for his children and grandkids.

Opportunity 2: If he outlives his policy

Should Victor live until a ripe old age of 99 – which is quite possible as life expectancies continue to increase – he’ll receive a Longevity Reward of S$588,501, which is 100% of his premiums paid for the base plan.

These are benefits Victor could enjoy during his coverage term, i.e. while he’s alive. Should he die during the coverage term, his loved ones will receive the S$3 million sum assured as a substantial legacy gift. So, either way (whether he dies during or after his coverage term), this limited pay term life insurance policy will pay out.

Can limited pay term life insurance help boost your legacy plans?

Yes. A plan like Singlife Elite Term II (Limited Pay) can help boost your legacy plans in several ways:

• High coverage amount

 You can choose coverage amounts of up to a few million dollars. Your loved ones will receive this cash when you die and can use it as they wish, making the plan ideal as a legacy gift.

• Long-term coverage 

Being covered until age 99 boosts the odds that your beneficiaries will receive the sum assured (the life expectancy at birth for 2023 was 83 years¹).

• Premium term as short as five years

Completing premium payments earlier gives you the assurance that even if something unfortunate happens to you down the road, like severe disability or retrenchment, you can rest assured that your protection-cum-legacy plan for your loved ones is fully paid and locked in well in advance. With this commitment “settled” for good, you’ll also be free to focus on other goals, like building an inheritance for your family.

Conclusion

The limited pay premium term option in term life insurance opens up new possibilities. However, there are many factors to seriously consider before choosing this premium payment term. If you have the financial bandwidth for the larger premium amounts and wish to free yourself of this financial commitment early, it could even be a strategic way to bolster your financial legacy plans. An early end to your premium payments may well be a happy and anticipated ending in your eyes, too 😉.

^Notes

^{1. Source: Department of Statistics, Ministry of Trade & Industry, Republic of Singapore, Complete Life Tables for Singapore Resident Population 2022-2023, accessed on 21 August 2024.}

^{All ages mentioned refer to age next birthday.}

^{As buying a life insurance policy is a long-term commitment, an early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premium paid. Buying a health insurance policy that is not suitable for you may impact your ability to finance your future healthcare needs.}

^{This advertisement has not been reviewed by the Monetary Authority of Singapore.}