For some people, limited pay life insurance is the best option for them. Of course, you need to remember that there is different life insurance coverage and type for everyone. The limited insurance policy may work best for you, but not for the others. That’s fine because there is nothing right or wrong when it comes to preparing for the best financial plan for your family. You should know your options and which one would work out best for your situations.
Limited Pay Life Insurance: What Is It?
As it was said earlier, the limited pay life insurance isn’t for everyone. It is a part of whole life insurance allowing you to prepay your coverage’s entire cost for a (set) number of years. This insurance policy is the right one in the event you pick a whole life insurance policy, but you do want to pay for the full premium costs within a certain period of time – rather than over a lifetime.
The traditional permanent (life) insurance premiums should be paid for the individual’s whole duration life. But when going with the limited pay whole life policy, the length of the payments must be decided at the policy’s initial buying. The premiums are usually paid over within the first 10 years – up to 20 years, in most cases. You are able to pay for the premiums within quarterly, monthly, annually, or semi annually manner, as long as it is done in 10 years, or 15 years, or 20 years.
Whereas whole life policy typically has the option where the cash value growth can pay for the premiums, this limited pay life insurance doesn’t have such a thing. This kind of policy pays for its entire costs over time. This can be a great option for people who have purchased the permanent life insurance policy later in their life and then want to stop (funding) their policy, and yet they want to enjoy the cash value. In certain cases, money from a qualified retirement plan (like IRA) could be used to pay for this limited pay policy. But you need to consult your insurance agent or professional financial expert to really be sure about it.
How Whole Life Insurance (Premium) Works
To understand how limited pay life insurance works, you need to know how the general whole life premium works at first. Whole life insurance is a part of permanent life insurance. From the name alone, you should be able to guess that this policy would guarantee coverage (for life). If you always pay your premiums on time, your beneficiary would be guarantee a death benefit, meaning that they will get money when you pass away. Normally, you are expected to pay these premiums in various manners. It can be quarterly, monthly, annually, or semi annually for the entire your lifetime.
When you pay for the premium, a portion of it would go paying for the death benefit and also associated fees. Another portion would go to the so-called cash value, which is your built-in savings account in your policy. Can you access the cash value? Yes, you can. In fact, you can access it anytime. The death benefit would be advantageous for your beneficiary, while the cash value can be advantageous for you yourself. You can withdraw your cash value or take a policy loan (it’s when you take a loan out against your policy).
Naturally, the action of the withdrawal can affect your death benefit. It may lower the death benefit. But if are able to repay the loan on time, then your death benefit will remain intact. Your beneficiary won’t be affected in any way, provided that you repay your loan.
This is how permanent life insurance work – in most cases. However, you should be aware of that not all permanent life (insurance) premiums work in a similar way. Whole life premiums are level. It means that they will remain the same; not going up or adding up. Some policies (such as variable life or universal life insurance) allow the policy holder to make adjustments to the amount of policies, which can be a good thing or a bad one.
In one side, you are given the flexibility to manage your payment in the event you experience (financial) hardship. But on the other hand, decreasing the premium can deplete the cash value or reduce the death benefit. It’s even possible that the policy lapses and you finally lose coverage. Not to mention that you aren’t the only side who is able to adjust the premium as the insurance company also has the ability (and the right) to raise the premiums any time if they decide to do so.
That’s why it’s easier to have level premiums. They make it easier for the policy holder to plan for. Plus, these premiums will stay the same and never change. This is crucially important when you want to save for retirement or you want to build up budgets. Basically, the level premiums are the fixed expense that you can depend on.
Level premiums have another benefit. Your whole life policy can offset the premiums due. It means that you should be able to use your dividends or cash value to pay for the premium. It’s safe to say that your policy may be able to pay for itself in the end.
How the Limited Pay Premiums Work
With this limited pay life insurance, you don’t have the option to pay the insurance premium from your dividends or cash value. You will have to pay for the policy’s cost within its entirety. The policy can still growth wealth (in potential dividends and cash value), but you choose not to put those funds to pay for the premiums.
With limited pay life insurance, you are able to choose the proper timeframe for paying the policy, such as in 10 years or 20 years. Another alternative is that you are able to decide to stop paying the premiums within certain age, such as 67, and then the premium cost would be adjusted easily. You can still decide whether you want to pay the premiums annually, quarterly, or others. What if you want to pay just once in one lump sum payment? You can do it. However, you MUST decide whether you want your whole life policy to be structured for the limited pay or not BEFORE you buy it. It’s a decision that can’t be changed once the policy applies and is in force.
The limited pay life insurance is handy for those who want to buy permanent life insurance quite late in life, and they don’t want to continuously funding the policy, and yet they still want to get the guaranteed return on the cash value and the (non-guaranteed) dividends. This is also useful for those looking for income during the retirement through the dividend payment or cash value, and they won’t need to have any concern about funding those premiums.
The Payment Structure of Life Insurance
Whole life insurance may seem ideal and promising, but you need to know the different payment structure types, along with each positive and negative side. You should also know that policy offerings may be different from one state to another one.
- The Standard Whole Life Insurance
Many of the standard (whole life) policies offer coverage up to 121 years old, meaning that you ‘owe’ the premiums until you are 121 of age. You need to remember that when you die, the policy would terminate; no matter how much you have paid. Your beneficiary would be the one getting the death benefit (which is tax free), minus outstanding policy loans, if any. From cost point of view, paying the policy within long period of time has the main advantage of being able to afford the premiums, when compared to the limited pay whole life type.
- Single Pay
Also known as single premium, this life insurance would be paid in one lump sum. Its best advantage is that you ‘supercharge’ the policy for growth. You basically optimize it to boost potential dividends and cash value. Unfortunately, the IRS doesn’t really like this method. They call it MEC or Modified Endowment Contract. It’s related to the taxes and stuff. If you want to know the details, discuss it with a professional financial expert.
- 7 Pay Whole Life Policy
It’s also known as the overfunded life insurance. It works like a singe pay policy to optimize growth, but it also gets the tax benefits of the standard whole life type. It’s well structured so that your policy would be paid up within 7 years while meeting the minimum requirements of the IRS to be considered a legit whole life insurance (with cash value) and not a MEC.
- 10- or 20- or 25-Pay Whole Life Policies
The incremental limited pay life insurance between 10 years and 30 years is able to adjusted (or customized) depending on WHEN you want to stop paying for it. The shorter the payment period is, the costlier your premiums would be. However, there is an advantage to it. The faster you pay the policy up, the quicker you can to optimize the growth in your dividends and cash value.
- Whole Life Paid to 65
For those who are getting ready for their retirement and not wanting to worry about funding their premiums, the limited pay policy can be a good option. It depends on the insurer, really, so you can customize the policy to coincide with the retirement age of yours; whether it’s 68, 70, 72, or more. Early retirement is also okay. The annual premiums are determined by your age; how old you are when you buy the policy and your health condition. The earlier it is, the smaller your premium would be, especially if you pick a policy that pays up when you have hit retirement age.
- Limited Pay for Kids
If you want your kids to be financially secured, the limited pay policy can be a good option. If you have insured them in very young age, you are looking at a very affordable premium, and you won’t have to worry about their well-being anymore. Not only you can manage a limited pay structure (before their adulthood), but you can also lock a great rate in successfully.
Buying the Policy
Again, this type of insurance may not be for everyone. You need to look into your overall condition, financial conditions, and others. It would be best if you have a professional insurance agent or a financial advisor (or expert) that can work with you to discuss things thoroughly. Budgets are crucial because you don’t want to stress out over financing the policy, and it happens on the entire span of your lifetime! Think carefully whether limited pay life insurance is the right one for you, and if it is, then start planning up ahead.