What Is Limited Pay Whole Life?

In this article...
  • Get the facts about limited pay whole life. Find out how this insurance works and what its benefits are so you can make an informed choice about coverage.

Life insurance can do more than just provide benefits to your loved ones when you die. Permanent life insurance policies build a cash value that you can use to cover expenses and supplement your income during retirement. Limited pay whole life insurance helps accelerate the growth of the cash value of permanent life insurance, making it beneficial for some people. Understanding how this type of insurance works will help you determine if it's right for you. 

What Is Limited Pay Whole Life?

With a limited pay whole life insurance policy, you pay premiums for only a specific amount of time. Depending on the terms, you make payments:

  • For a predetermined timeframe that you choose from a list of options, such as 10 or 20 years
  • For an exact time frame that you specify, such as 17 or 21 years
  • Until you turn 65

No matter how long you pay premiums, the life insurance remains in effect for your entire life.

How Is a Whole Life Policy Different From a Limited Payment Policy?

Most limited payment life insurance is a type of whole life insurance. The main difference between whole and limited pay insurance is the premium payment schedule. With a limited payment whole life policy, you pay for the entire life insurance policy during the first years only. A whole life policy generally requires premium payments for your entire life unless you opt to use the cash value to pay for premiums at some point.

Whole life and limited payment insurance have many similarities. They both:

  • Last for your entire life
  • Pay a death benefit when you die
  • Accumulate a cash value over time
  • Are likely to pay a monthly dividend
  • Usually require a medical exam for underwriting
  • Can be used to obtain policy loans, lending agreements that use the cash value of a life insurance policy as collateral

What Is the Advantage of Limited Payment Life Insurance?

Limited payment life insurance has a few advantages compared to standard whole life.

  • Faster cash value growth. Because you pay for your policy up front, the cash value grows faster. By building up the cash value sooner, you can earn more interest over time because of compounding.
  • Futureproofing. Many older adults experience a decline in income after retirement, and this could make continuing to pay for life insurance premiums difficult. Limited pay life insurance allows you to cover the premiums at the beginning when you can afford it. If you suffer financial hardship for any reason after the payment period ends, you won't have to worry about paying premiums.
  • Retention of cash value. Whole life policies may allow you to use the cash account to cover premium payments, but if you choose this option, the value decreases, leaving you less money to cover expenses or supplement your income. With limited pay life insurance, you don't have to sacrifice the cash value of your policy to eliminate future premium payments.

For Whom Is Limited Pay Life Insurance the Best Option?

Generally, limited payment life insurance is best for older adults who are taking out a new whole life insurance policy because younger people have more time to pay premiums and build up a cash value. For seniors, limited pay policies make it possible to quickly accumulate a cash value that can pay dividends or be accessed to cover long-term care expenses and other costs.

The downside to limited pay life insurance is that your monthly premiums will usually be higher than what you'd pay for a standard whole life policy because you're covering the entire cost in a shorter period. As a result, some people may not be able to afford the initial monthly cost of limited pay life insurance.

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