How Does Limited Payment Whole Life Insurance Work?
Limited-pay whole life insurance is a policy in which you pay premiums for only a finite period of time. After all payments are made, the policy reaches paid-up status. At this point, premiums are no longer required, and your coverage remains intact.
This is very different from traditional whole life insurance policies, which require payments indefinitely. Bear in mind that traditional whole life policies are less expensive because the payments never stop. Limited pay policies can cost 25%-200% more than typical whole life plans.
Being a type of whole life insurance, you can expect the following benefits:
- Fixed premiums
- Lifelong coverage
- Cash value accumulates on a tax-deferred basis, which you can withdraw at any time and spend with no restrictions.
- Upon the insured’s death, the insurer will pay the death claim in cash (tax-free) to the beneficiaries, who can spend it however they wish.
Types Of Limited Pay Insurance Policies
First, only whole life policies can have a limited-payment feature. There’s no such thing as a limited-pay term life or universal life insurance policy.
It’s most common for limited-pay life insurance policies to become paid up after a specific number of years. The typical options include:
However, some companies (not many) offer limited pay plans that become paid up once you reach a certain age, such as:
- Paid up at 65
- Paid up at 80
There is one final option called “single premium whole life insurance“. As the name implies, you make one bulk payment, and the policy instantly becomes paid up.
Keep in mind that the shorter the pay period, the higher the cost. Also, once the policy is issued for the specified limited period, it cannot be changed.
How Much Does Limited-Payment Whole Life Insurance Cost?
Below are some example paid-up whole life insurance prices (for $100,000 in coverage) for various limited terms. As with any type of life insurance, your cost will be based on many variables, such as gender, age, health, coverage amount, and the length of payments until the policy reaches paid-up status.
Pros And Cons Of Limited-Pay Whole Life Insurance
- Payments stop at some point: With most life insurance policies, you’re going to pay for as long as you want to have coverage. That is not the case with limited pay plans.
- Builds cash value: All types of whole life insurance (limited-pay or not) accrue cash value that you’re entitled to borrow from and use however you want.
- Lifelong coverage: Whole life policies always last forever.
- Fixed premiums: Whole life insurance premiums cannot increase.
- Reduces bills in retirement: If your policy is paid up before retirement, it’s especially valuable, since it’s one less bill to pay at a time when your income is lower than when you were working.
- Can pay dividends: Some whole life policies pay dividends. Usually, only participating whole life plans pay dividends.
- Higher cost: Limited-pay whole life policies always cost more (usually 25%-200% more) than standard whole life policies.
- Potential for a MEC: Cash value life insurance policies can sometimes become a “modified endowment contract” (MEC). It’s an IRS rule that limits the cash value you can have in a policy during the first 10 years. If you exceed their limits, the policy can become a MEC and lose the ability to accumulate cash value on a tax-deferred basis. When you get a policy, there will be a clear outline of cash value limits so you know how to avoid this.
- You could get a higher death benefit: If you took the premium and bought a non-limited-pay whole life policy, you would have a significantly higher death benefit.
- Lower payments via standard whole life: If you bought the same amount of coverage with a normal whole life policy, the premiums would be much lower.
- Could use your money elsewhere in a superior way: First, remember that your premiums are higher since they stop at some point. That additional money you’re paying each month could be invested in other financial tools that may yield a better outcome for your life. It’s often referred to as “opportunity cost” for any financial endeavor. Just be sure to consider all your options (life insurance and other financial products) before making a final decision.
- Limited options: Not many life insurance companies offer limited-payment policies, so they can be difficult to find.
Alternative Options To Limited Pay Whole Life
If you’re considering a limited-pay whole life policy and are unsure about the drawbacks (in particular, the higher cost), here are some alternative policies to consider:
- Standard whole life insurance: Non-limited pay whole life policies cost much less and are far more available (nearly all insurers offer them).
- Universal life insurance: Permanent coverage that builds cash value and will cost less than whole life. The primary difference between universal life and whole life is that you have flexibility with universal life regarding premium payments. You can pay more or less at any time.
- Term life insurance: Temporary coverage that will expire after a defined period of time (usually a number of years). Term life insurance is always substantially less expensive than whole life policies. The trade-off is that coverage will end, and the insurer keeps your premiums (unless you bought return of premium term life).
- Final expense insurance: A type of whole life insurance with small coverage options (usually less than $50,000). Many final expense policies have limited pay features. Yet, the cost remains very low because the coverage itself is so small.
Frequently Asked Questions
Once a life insurance policy is paid up, it will remain active and continue to insure you forever. You simply don’t need to make any further payments.
Not all whole life insurance policies are limited-pay, which means they will eventually become “paid up”. To get a policy that one day becomes paid up, you must specifically buy a limited-pay plan. Otherwise, you’ll have a policy that is “life-pay,” meaning you’ll make payments forever.
When you cancel a limited-pay policy, the insurer will refund you the cash value, if any.
- Nationally licensed life insurance agent with over 16 years of experience.
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Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
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David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
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modified endowment contract. https://www.investopedia.com/terms/m/modified-endowment-contract.asp
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opportunity cost. https://www.stlouisfed.org/open-vault/2020/january/real-life-examples-opportunity-cost
