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What is a Deferment Period?

Updated on July 16, 2024 , 895 views

The deferment period refers to when the borrower is not required to pay the interest or repay the principal on any loan. It is also referred to as the time after issuing the callable security, during which the issuer cannot Call the security.

Deferment Period

The deferment period’s duration varies and is established beforehand by a contract between the two involved parties. For example, the deferment period of a student loan is up to 3 years, while for the municipal Bonds, it is ten years.

Key Points About Deferment Period

  • This period is referred to when the interest is incurred on the loan, and it is then added to the principal amount after the period ends.
  • Additionally, a contractual agreement about the deferment period’s length must be signed by the borrower and the lender. The borrower is required to present an economic hardship for getting the period granted.
  • It is also automatically applied in the case of some loans.

Types of Deferment Periods

There are various types of loans that a borrower can get in the global Financial Sector. Each loan has its application for the deferment period, and different loans have different deferment periods, as mentioned below:

  • Student Loans

A student loan is granted mainly during school or after graduation to allow the student to gain financial resources during the deferment period. The interest also varies for it. In some situations, there is no interest accrued on a student loan, and vice versa. Furthermore, interest accrued on the deferred student loans is unsubsidized.

There is a deferment period in Life Insurance for such employees who are unable to work for some time. During this period, the employee is incapable of accumulating benefits, and the claim payments get deferred.

  • Mortgages

In various cases, the first payment gets deferred for a newly established mortgage. For example, a borrower who got a loan in June might not have to start making the mortgage payments until August.

  • Callable Securities

The deferment period is the duration when the issuing entity has no rights for redeeming a bond. Additionally, the issuer is not able to call back the security for the agreed deferred period.

  • Options

There are specific options that are exercisable before getting expired. Until the principal option expires, the payments are deferred.

Deferment Plan in LIC

Lately, Life Insurance Corporation (LIC) launched a deferred annuity plan, which is individual single, non-participating, non-linked premium plan. For the New Jeevan Shanti plan, the annuity rates are guaranteed at the beginning of the policy. Also, annuities can be paid after the deferment period, throughout the annuitant’s life.

This deferment plan can be purchased both online and offline. Also, it comes in two varying annuity options, such as:

  • Deferred Annuity for Single Life

Under this plan, the annuity payments will be made in arrears until the annuitant lives once the deferment period is over and also as per the selected mode. In case there is a sudden death, after or during the deferment period, death benefits will be offered to the nominee.

  • Deferred Annuity for Joint Life

Under this plan, the annuity payments are made in arrears until the primary or the secondary annuitant is alive, based on the selected mode. Also, this happens after the deferment period in LIC. If the last survivor dies, after or during the deferment period, the benefits will be given to the nominee.

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A deferment period is considered a feasible choice for any person who faces economic hardship. It allows the borrower to have a breathing room and get back to their feet with the help of the deferring period and the relaxed interest payments. However, there is an increase in the total loan amount due to this period.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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