Life insurance provides assurance for more than just final expenses. It can also provide the funds for emergencies, replace a spouse’s lost income, and even act as an inheritance.
If you’re beginning your search for the best life insurance coverage and browsing quotes, you’ll most likely be provided with a quote that reflects either the monthly, quarterly, semi-annual or annual cost of the coverage. This is what is known as the premium.
Unless otherwise requested, the majority of life insurance quotes are shown to reflect the cost of the life insurance each year for however long the life insurance contract will be purchased for. This is how nearly every life insurance quote is presented to a consumer that is requesting a quote.
For example, let’s say you were interested in a 30-year term life insurance policy and have requested a quote to see what the rate will be. Since term insurance has a fixed rate for the duration of the term contract your quote will reflect a fixed yearly price that is guaranteed to remain that price up until the end of the 30th policy year.
The same also goes with permanent life insurance, like universal life and even whole life insurance. Similar to a term insurance quote, a permanent life insurance quote will also have a fixed yearly premium that is also guaranteed to remain the same price throughout the entire lifetime of the contract.
So what if you don’t want to pay premiums each year? Are there other options?
Yes there are and it’s referred to a limited pay life insurance.
What is Limited Pay Life Insurance?
A limited pay life insurance policy is really exactly how it sounds. It allows for premium payments that would normally be paid throughout the entire contract to be paid in a much shorter duration of time resulting in a paid up life insurance policy.
A paid up life insurance policy means that you have paid for the entire cost of life insurance coverage ahead of schedule and no more payments are required.
With all limited pay life insurance policies, premium payments will be much higher than if you were to pay the scheduled premium payments throughout the entire lifetime of the contract.
The reason for this is because the payments are condensed into a much smaller paying timeframe, rather than them being stretched out throughout the entire contract duration.
Types of Limited Pay Life Insurance Options
Most limited pay life insurance options are associated with whole life insurance coverage. Although not as common as whole life insurance, both universal life and even term life insurance can be modified to have limited payments if requested.
Because limited pay options are more common in whole life insurance situations, we will discuss the several limited pay options that are available on a whole life insurance policy.
Single premium whole life insurance is paid for in one sum.
Fixed Period Pay
There are 7, 10, 15, 20, and 30 pay policies within whole life insurance plans.
Premiums in a 7-pay policy are paid off in seven years. The policyholder enjoys life insurance for life and the policy is considered cash value after seven years.
As you can guess, 10 pay policies are paid off in 10 years. There is not much different to a 10-pay policy except the premiums are lower than a seven-year policy.
The 15 and 20-year pay policies are beneficial due to lower premiums. The time frame is still short which is why this is a popular choice for a child’s plan.
Premiums in a 30-pay life insurance plan are among the cheapest options. They also come with all the long-term benefits relative to cash values and interest.
Pay to age 65
Another option is the limited payment policy to age 65.
This involves payments until the age of 65 and is a popular choice for those who cannot afford to pay high premiums for shorter spans, but do not want to pay for insurance during retirement.
Benefits of a Whole Life Insurance Policy
Because the limited pay option is more common in whole life insurance policies, we think it’s important to discuss some of the benefits that whole life insurance coverage can provide.
Fixed Premium: Whole life insurance policies come with a fixed premium. This means that once you are approved and the contract has been activated, you won’t have to ever worry about your premium payment ever changing on you.
Guaranteed Death Benefit: A guaranteed death benefit assures that the beneficiary of the life insurance contract will receive 100% of life insurance death benefit proceeds should the insured pass away.
Guaranteed Cash Values: Whole life insurance policies offer guaranteed cash values that grow based off a minimum interest rate. The cash values will continue to grow year after year and can be used as income through policy loans.
Potential Dividends: In addition to guaranteed cash values, whole life insurance policies considered to be “participating” may have the potential to earn dividends. Dividends are additional payments paid by the insurance company to the policyholder.
Policy Add-Ons: Whole life insurance policies have several included as well as optional policy riders that can be added to the base coverage. Policy riders can enhance the life insurance coverage in both protection as well as cash value build up.
Limited Payment Options: Whole life insurance offers several different limited payment options allowing for the entire life insurance coverage to be paid up in a short duration of time.
What are the Benefits of Limited Pay Life Insurance?
One of the biggest benefits of electing to purchase a limited pay life insurance policy is not having to worry about making premium payments for the duration of the entire life insurance contract.
For permanent plans such as a limited pay whole life insurance policy, it can be a relief knowing that your coverage will be paid up and you will not owe premium payments into your elderly years. This can be especially beneficial when a fixed budget is required later in life.
Another nice benefit to making larger limited payments is the potential tax deferred cash build up it can earn. By making larger payments, the cash values can grow much quicker and significantly greater.
This is one of the many benefits of having a limited payment life policy. If times get hard, you can take cash in the form of policy loans from your life insurance policy.
Another benefit is premium back up.
Premium back up applies more so with universal life insurance policies, as it allows for more flexibility on skipping premium payments. As long as there is enough cash build up within the universal life insurance policy, you can skip premium payments as they can be deducted from the cash value keeping the policy from lapsing.
One last benefit, which is really a great one, pertains to children. A limited pay life insurance policy for a child can provide permanent protection on a child that will last an entire lifetime. In addition, there can be great cash build up waiting for them later in life when they could use it most.
Potential Concerns of Purchasing Limited Pay Life Insurance
If you are considering a limited pay life insurance policy you can rest assure that there are very few negative draw backs. However, a concern worth noting is that you can expect premium payments to be much higher.
The reason for higher payments is because you’re paying for the entire life insurance coverage in a significantly shorter timeframe than if you were to pay over the entire life of the life insurance contract.
If you do decide to pay for your entire life insurance coverage in one shot which is know as a single pay, there could also be the potential of creating a MEC or modified endowment contract.
When MEC occurs on a life insurance policy it creates a taxable occurrence on the cash build up. On the bright side, most life insurance companies will provide you with advance warning should there be a potential of a MEC occurring.
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