What is a Limited Pay Life Insurance Policy?
When shopping for life insurance, one of the most pressing concerns is the duration of your coverage. For some individuals, term insurance can provide peace of mind for a specific period, such as 10 or 20 years.
However, for others, whole life insurance is a better alternative because it offers permanent protection for life. Unfortunately, you have to pay the premiums for a very long time, making it a more expensive proposition.
What if you could pay off your plan early, though? With limited-pay life insurance, it’s possible. Today we’re going to illustrate how these policies work and why they may be an ideal choice for your needs.
How Does Limited Pay Life Insurance Work?
Typically, when purchasing whole life insurance, you have to pay premiums for as long as you want the plan. Unlike term coverage, your monthly payments will adjust as you get older.
So, the younger and healthier you are, the less you pay upfront. However, once you reach a certain age (i.e., retirement), your premiums can be much higher.
Costs can be a primary issue with whole life insurance. Once you are retired, it may be an expense that you cannot afford. Fortunately, there is a way around that with limited-pay life insurance.
Rather than paying premiums forever, you choose a set amount of coverage and pay it off within a specific period. The most common options are 10 years, 15 years and 20 years. As you can imagine, the more extended period you choose, the lower your monthly payment.
Once you’ve finished paying off the plan, the coverage remains. Best of all, you can still accrue cash value within your policy. Since these funds can help out with retirement income, you can get the best of both worlds.
Here is an example pay scale to help illustrate how these plans work. These rates are from State Farm, but every insurance company sets its own.
- Ten-Year Policy
- Monthly Premium: $332.12
- Cash Value Portion: $82.12
- Fifteen-Year Policy
- Monthly Premium: $121.10
- Cash Value Portion: $21.10
- Twenty-Year Policy
- Monthly Premium: $70.60
- Cash Value Portion: $20.60
One crucial point to consider is that your cash value portion is locked in with this kind of plan. That means once you pay it off, you can’t contribute more money to the account. If you do the math, the total CV for each option is:
- Ten Years: $9854.40
- Fifteen Years: $3,798
- Twenty Years: $4,944
These rates are based on a minimum coverage amount, and the total cost depends on various factors, such as your age, health status, and medical history. As you can see, there is a significant benefit to paying off the plan as soon as possible. You can build a higher cash value, which can accrue tax-free interest.
Another component of limited-pay policies is that they offer monthly, quarterly, or yearly payments. If you pay the entire year up front, you can usually save some money while maintaining coverage and the same cash value. With the plans listed above, the annual costs are:
- Ten Years: $3,817.50
- Savings: $167.94
- Fifteen Years: $1,392
- Savings: $61.20
- Twenty Years: $811.50
- Savings: $35.70
Again, most of the benefit comes from paying off your policy as quickly as possible. So, if you were to choose a ten-year plan and pay once annually, you could save a total of $1,679.40 without sacrificing your cash value portion or coverage amount.
Advantages of Limited Pay Plans
In many cases, if you’re looking at whole life insurance, a limited-pay plan may make the most sense. Here are the primary benefits that it can offer:
- Zero Premiums During Retirement – You can enjoy your golden years without worrying about paying for life insurance.
- Additional Living Benefits – While the cash value portion can be enticing, most of these policies can include riders, such as disability benefits or accidental death and dismemberment. Each insurance company offers different riders, so be sure to compare options.
- Cost Savings – As we illustrated, you could save a bundle by paying off your policy quickly.
- No Rate Increases – Once you lock in your plan, you don’t have to worry about higher premiums as you get older.
- Flexible Payment Schedule – You can choose the system that works best for you. For example, if you want lower monthly payments, you can opt for a 20-year plan.
- Comparable Coverage Amounts – While you can’t choose as much of a death benefit as you could with standard whole insurance, the options are still more than sufficient for most individuals.
When to Purchase a Limited-Pay Policy
Because of these advantages, there are certain times when this kind of coverage is ideal. Some examples can include:
- Purchasing Life Insurance for a Child – As a parent, you want to protect your children throughout their lives. With a limited-pay plan, you can pay off your little one’s policy early so that he or she is covered forever.
- Reducing Costs for Retirement – If you’re within 10 or 15 years of retiring, this kind of policy might be better than traditional whole life insurance. This way, you can pay it off before you stop working.
- Utilize Cash Value Early – With a standard whole life insurance plan, it can take years to build up a significant cash value portion. With limited-pay policies, you can tap into these funds much sooner. So, if you’re planning on borrowing from your cash value within 10 years or so, it may make sense to get this kind of coverage.
Other Ways to Benefit From Limited-Pay Insurance
Since you are building cash value with this kind of plan, you can utilize the funds in a couple of different ways. Here are some options to get the most out of your policy:
- Paid-Up Additions – Not all insurers offer these, but paid-up additions can help you build both your death benefit and cash value. They are essentially small versions of whole life insurance that are “paid-up” immediately. Since your cash value is locked in with a limited-pay plan, this can be a way to build it higher.
- Infinite Banking – One of the best features of a cash value portion is that you can borrow against it. Once you have money in your account, you can take out a loan to cover various expenses. What makes this strategy even better is that you can repay the loan with interest. However, since it’s going back into your account, it’s not a loss. If you keep doing this, you can build a higher cash value portion in a shorter period.
- Retirement Annuities – Once you have a cash value portion, you can opt for annual payments once you retire. These annuities can be an alternate revenue stream along with your 401k or IRAs.
Disadvantages of Limited Pay Plans
Although limited-pay life insurance can seem enticing, there are some potentially significant drawbacks to consider. Here are a few reasons why you may want to opt for a different plan.
- Limited Cash Value – With standard whole or universal life insurance, you can contribute funds to your cash value as long as you keep paying premiums. Since this money grows tax-free, you may want to pay into your plan for longer than 10 or 20 years.
- Limited Coverage Options – Depending on the insurer, you may not have access to higher death benefits or insurance riders. This is why comparing plans is critical.
When Not to Get a Limited-Pay Policy
Depending on your situation, this kind of life insurance may not be a wise choice. Some cases where you don’t want to lock yourself into a contract can include:
- Using Life Insurance for Income – One of the benefits of whole or universal coverage is that you can build tax-free earnings. So, if you’re still young and have more than 20 years before retiring, you might want to create a higher cash value over time.
- Cost Considerations – Since these policies cost more upfront, it may not be useful to lock yourself into a contract. If you’re not too invested in building cash value, a term policy will be far more affordable.
Contact NextGen Life Insurance Today
Because limited-pay life insurance can be tricky to navigate, it helps to have an expert guide you through the comparison process. At NextGen Life Insurance, we’ll work with you to ensure that you find the right policy for your needs.
Whether you want to avoid high premium costs during retirement or you wish to build your policy’s cash value sooner, limited-pay coverage may be the best choice. Contact us today to find out more.