A limited-pay life insurance policy is a form of whole life insurance that refers specifically to how you pay for it.
Unlike traditional whole life insurance, where you pay fixed premiums for the duration of your life, the limited-pay option allows you to make larger fixed payments over a set, shorter period. After that, you’re done making payments, but coverage continues for the rest of your life.
This guide will explore how a limited-pay life policy works, the pros and cons, and if it’s right for you.
Table of Contents
- What Is Limited-Pay Life Insurance?
- Cash Value of a Limited-Pay Policy
- Pros & Cons of Limited-Pay Life Insurance
- Is Limited-Pay Right for You?
- Limited Payment Life Insurance FAQs
Not sure if whole life insurance is the right choice for you? Take the time to understand the differences between whole and term life insurance, so you can make an informed decision.
What is limited-pay life insurance?
When you buy life insurance, your carrier agrees to pay death benefits to your beneficiaries if you die while it’s active.
Because whole life insurance lasts your entire life, your loved ones are guaranteed to receive a death benefit payment.
Typically, policy owners pay premiums regularly for the rest of their life, called a continuous payment schedule.
There is another payment option for whole life insurance called limited pay, which offers two main advantages:
- Limited premium payment period
- Faster cash value accumulation
Limited-Pay Life Insurance Payment Options
Limited-pay whole life insurance involves paying premiums for a set number of years, such as 10, 15, or 20. Although less common, some insurers also offer the option to pay premiums until reaching a specific age, typically 60, 65, or 70.
Limited-pay policies have higher premiums than continuous-pay whole life insurance because the payment schedule is shorter.
The table below illustrates the difference in price depending on the payment schedule of a whole life insurance policy. The applicant is a healthy 35-year-old male.
|Payment Schedule||Monthly Premium|
|Continuous-Pay Whole Life||$119.71|
|10-Pay Whole Life||$514.43|
|15-Pay Whole Life||$316.16|
|20-Pay Whole Life||$223.42|
|Payable to Age 65||$177.31|
Continuous-pay whole life insurance is the standard option. Premiums are less expensive because payments are spread over your entire lifetime, unlike limited pay.
|Note: When you pass away, life insurance payments cease. Therefore, no matter which payment structure you choose, financial obligations end at death. For example, if you select a 20-pay policy and die at year 10, no additional payments are required, and your beneficiaries still receive the total death benefit amount.|
Cash Value of a Limited-Pay Policy
Most permanent life insurance policies build cash value over time. With cash value life insurance, some of your payment goes towards coverage itself, and the rest is invested.
Policy owners can access cash value through policy loans. Here’s how they work:
- Loans accrue interest, but rates are generally more favorable than banks.
- While policy owners aren’t required to repay the loans during their lifetime, any outstanding balance will be deducted from the death benefit upon the insured’s passing.
- Loans are not reported to credit bureaus and therefore do not impact credit scores.
The growth of cash value in whole life insurance depends on the interest rate and premium contributions. Insurers set a guaranteed interest rate, ensuring steady growth.
Just like money growing with interest, the more you pay into it, the faster it accumulates. Limited-pay policies grow more quickly than continuous-pay ones due to higher premiums and the compounding effect of interest
*Limited-Pay Life Policy Example: 20-Pay Versus Continuous-Pay
- Death Benefit Amount = $100,000
- Annual Premium (Required Payments for Entire Life) = $1,150
- Cash Value Total after 20 Years = $27,203
- Death Benefit Amount = $100,000
- Annual Premium (Required for 20 Years) = $2,234
- Cash Value Total after 20 Years = $60,391
*Insured is a healthy 30-year-old male who doesn’t smoke.
Borrowing from your life insurance policy may be a great idea for some but not for others. Learn more about borrowing from life insurance.
See what you’d pay for life insurance
Pros and Cons of Limited-Pay Life Insurance
When considering any financial product, understanding its pros and cons is important to making an informed purchasing decision.
Pros of a Limited-Pay Policy
- Limited Premium Payment Period: Offers a shortened payment window for lifelong coverage without continuous payments.
- Faster Cash Value Growth: Higher premiums result in more rapid growth of cash value, providing a flexible source of funds.
- Predictable Costs: Fixed rates with a clear end date to financial obligations allow confident future planning.
Cons of a Limited-Pay Policy
- Higher Costs: Premiums are higher during the limited payment period compared to continuous-pay policies.
- Opportunity Cost: The higher premiums might yield more if invested elsewhere, depending on financial goals.
- Risk of MEC (Modified Endowment Contract): Overpaying premiums may lead to loss of tax advantages.
- Early Death Results in Higher Cost: If death occurs at a young age, the total cost will be higher due to increased premium payments.
Is limited pay right for you?
Limited-pay whole life insurance can be an excellent option for those attracted to the cash value accumulation of life insurance and who want to complete premium payments early. However, you need to be mindful of the policy’s cost.
A limited-pay policy may be suitable for the following:
- Older individuals who want to supplement retirement funds
- Young professionals with clearly defined financial goals (e.g., start a family, buy a house)
- Adults budgeting for retirement
- Individuals prioritizing low-risk cash value
- People who want lifetime coverage without lifetime premiums
- People purchasing coverage for their children
- Those interested in infinite banking and being their own banker
As with any financial decision, you need to consider personal circumstances and goals before choosing a payment option. If you’re uncertain, contact us for an unbiased needs analysis.
Quotacy is an independent life insurance broker whose agents don’t work on commission, which means we’re here to serve your best interests. You’ll never get a sales pitch or pressure from us.
FAQs: Limited-Payment Life Insurance
Permanent life insurance is complex, so we understand if you have a question or ten. Here we answer some of the most common questions we receive.
What happens after I finish paying premiums on a limited-pay policy?
Once your payments are complete, your coverage remains for the rest of your life, and you won’t have to pay any more premiums. In addition, your cash value accumulates, which you can access via policy loans.
Can I borrow against my limited-pay policy?
Yes, you can take out loans against the policy’s cash value. These funds can be used however you wish.
You don’t have to repay the loan, but the balance (and interest) will be deducted from your beneficiary’s payout if you don’t.
Can I change my premium payment period?
No, the payment period is typically fixed in a limited-pay policy. Once chosen, it cannot be changed, ensuring the policy remains on track for the specified payment duration.
But you do have the flexibility to overfund the policy by paying more than the required premium amount.
Be cautious, as excessive contributions to the policy’s cash value compared to the death benefit can trigger MEC status. Modified Endowment Contracts have different tax treatment, and withdrawals may be subject to additional taxes and penalties.
Consult a financial professional before overfunding.
Can I cash out my limited-pay life policy?
Yes, you can cash out your limited-pay life policy by surrendering it. If you do so, you receive the accumulated cash value. Remember that policy surrender terminates coverage and may have potential tax implications.
Get Whole Life Insurance Quotes Through Quotacy
There are many different life insurance coverage options. A limited-pay whole life policy offers advantages like faster cash value accumulation, permanent coverage, and no lifelong premium payments. However, it’s not right for everyone.
The cost of a life insurance policy is determined based on factors like your age and health. Not everyone can comfortably afford a limited-pay whole life insurance policy.
Contact us here at Quotacy for personalized whole life insurance quotes. As an independent broker, we work with over 25 of the nation’s top insurance companies and can help find a policy that fits your needs and budget.
Note: Life insurance quotes used in this article are accurate as of August 21, 2023. These are only estimates and your life insurance costs may be higher or lower.