Whole Life Insurance
Asked 1w ago
For limited pay plans, usually there are payment durations: 12 years, 20 years, 35 years, etc. If i choose a plan that pays for longer years, my monthly payment will be lesser, but overall i pay more premiums. Hence, is there any real benefit of longer pay plans (pay for 35 years) as compared to shorter ones (pay for 12 or 20 years)? What other factors should i consider in selecting my payment duration?
Hello there! I happen to be reading the CMFAS Module 9 book and want to share some facts from the book
"By allowing the more frequent payments, the insurer would lose the interest that it could have earned should the policy owner have paid the premium on an annual basis. In addition, it would incur expenses for processing the additional number of payments each year. As such, insurers would cost in these two factors when computing the other frequent modes of premium payments. For example, some insurers charge an additional 2% of annual premium if policy owners choose to pay monthly rather than yearly premiums."
Granted that this is taking about the frequency of payments instead of the length of payment duration. But I believe the essence is still that the more times you pay for the same total amount in the end, the less the insurance company can make out of you deposits therefore, they will charge you higher premiums.
But do also make sure that you are able to manage the monthly payment if you want to opt for the 12 year one (although in the long run, you will pay lesser compared to the 20 year one)
From a risk management standpoint, the ideal trade off is to pay the least amount of money for the ideal coverage.
Opting for the shortest possible pay term, allows you to have the lowest capital outlay, however because of the short pay term, your liquidity will be impacted by the high premiums in the short term, as you assume the risk of the entire duration of the policy within the short premium duration.
Opting for the longest premium term, will result in increased capital outlay for your policy. However in the interim, the premiums will be more affordable. The higher frequency of payments allow you to pay the least possible amount, should you need to claim on your policy. The higher premiums paid on the entire policy, is due to the risk spread being spread out across a longer premium term.
The factors you should consider are;
Basis of Coverage, Ideal Amount to be covered for
Affordability of the Coverage
Ability to commit long/short-term to your proposed plan
I hope i was able to shed some insight with regards to your question. If you have further questions, do reach out with a contact request, and we can take it from there!
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