Limited Pay Life Policy

In this article...
  • Find out what a limited pay life policy is, including information about the advantages and disadvantages and how to tell if it's the right choice for you.

A limited pay life policy lets you prepay your premiums for permanent coverage. However, they're not the right choice for everyone. Below, you can find out everything you need to know about limited pay life policies. 

What Is a Limited Pay Life Policy?

A limited pay life policy is a type of whole life insurance. Unlike regular whole life insurance, the beneficiary pays premiums over a shorter time instead of their entire lifetime. The policy name refers to the number of payments the beneficiary needs to make until the policy is fully paid up. For example, 10 pay life insurance requires 10 payments, while a 20 pay policy requires 20 payments. Some insurers also allow enrollees to select a specific number of payments, which may be an attractive feature if you plan to retire in a particular year.

Some policies are paid into until the enrollee reaches 65, known as paid to age 65 life insurance. If you choose this type of policy, the total number of payments required depends on your age at enrollment.

The older you are, the fewer payments you will make because the time until you reach 65 is shorter. However, older beneficiaries will need to pay higher premiums than younger enrollees for the same coverage because their payments are spread over a shorter period. 

In other words, a limited pay life policy allows enrollees to prepay their whole life insurance premiums and receive a guaranteed death benefit no matter when they die. Unlike level term policies, a limited pay life policy accumulates cash value over time because the premiums are invested. You'll typically pay higher premiums than you would for a regular whole life policy because your payments are spread over fewer years. 

Beneficiaries can typically select the payment frequency when they enroll in  a limited pay life policy. You can choose between a monthly, a quarterly, a biannual or an annual payment schedule depending on your needs. 

Limited Pay Life Policy Advantages

The primary advantage of a limited pay life policy is that it can provide peace of mind. Once your policy is fully paid, you are guaranteed a death benefit and it continues to accumulate cash value without the need for further payments. Many people choose this policy type because they want to have their life insurance taken care of before they retire and don't want to worry about keeping up with premium payments when their income reduces. 

Furthermore, limited pay life policies usually gain cash value faster than regular whole life policies because beneficiaries make higher premium contributions over a shorter period. Therefore, the investment value is higher without costing the insurers any more than it would to insure the individual on a whole life policy. The added benefit of paying higher premiums over a shorter period is that it often yields higher dividends than normal whole life insurance. 

Finally, a limited pay life policy allows beneficiaries to withdraw some of the cash value or take out a loan against the cash value. Although you'll have to pay tax on any withdrawals, you could enjoy a better quality of life in retirement if you withdraw some of the cash value without the need to pay further premiums. Therefore, limited pay life policies could be a good option for people who want to use their life insurance policy to cover some or all of their living costs in retirement.

Limited Pay Life Policy Disadvantages

The main disadvantages of limited pay life policies are high premiums and lack of flexibility. Many people don't have sufficient income to meet a limited pay life policy's high premiums. 

Your monthly or yearly premiums will be higher, and you're unlikely to have much wiggle room if your circumstances change and you need to change your premium amount. Some whole life policies let you reduce or even skip payments if your investments perform well and your policy has sufficient cash value, which could make them a better option if your financial circumstances are uncertain. 

Finally, you may not have access to as many benefits or riders as you would if you purchased a regular whole life or term policy. It's important to check which riders are available compared to other types of life insurance before committing. 

What Is an Example of a Limited Pay Life Policy? 

Annual payments for a limited pay life policy will depend on your age at enrollment and your coverage amount. Looking at an example of the annual payments at different ages can help you understand how your age affects your potential premiums and how they differ from standard whole life premiums.

A 40-year-old male will pay around $17,225 per year on a 10 pay policy with $500,000 coverage. The same policy would cost a 65-year-old male roughly $37,490 per year. Meanwhile, a similar beneficiary could purchase a regular whole life policy with the same coverage amount and would pay premiums of around $6,388 per year at age 40, rising to $15,878 per year at age 60.

How Long Does the Coverage Normally Remain on a Limited-Pay Life Policy?

The coverage period for limited pay life policies is often a source of confusion. This type of life insurance covers you for as long as you live, even after the premium payment period is complete. Therefore, you can still withdraw from your policy's cash value, and your beneficiaries will receive a death benefit even if you live for many years after you stop making payments. 

Term life insurance policies also have limited payment periods, but your coverage ends at the end of the policy. Unlike a limited pay life policy, you aren't covered if you outlive the duration of a term life insurance policy.

Is a Limited Pay Life Policy Right for Me?

A limited pay life policy could be a good choice for you if your priority is paying up your policy by a set date and guaranteeing a death benefit. It could also be suitable for people who want to use their policy as a retirement income source. 

However, you'll need to be able to afford the high premiums, which could cause problems if your circumstances change as these plans tend to be inflexible. Therefore, it's wise to consult a financial advisor if you're unsure which life insurance policy is best for you.

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