A very interesting form of permanent life insurance is limited pay life insurance. This is an insurance category in which the premiums are only paid for a few years, but the coverage remains active for the entire life of the insured and has a guaranteed payout to beneficiaries.
With this form of insurance, you can enjoy all of the advantages and rights of whole life insurance without having to pay premiums in the final years of your life. In this article, we will tell you everything you need to know about limited pay life insurance.
Limited Pay Life Insurance: Table of Contents
What is Limited Pay Life Insurance?
If you are already certain that you are going to purchase a life insurance policy, you should consider a limited pay policy. This is a form of ordinary or traditional life insurance, the most common permanent-type life insurance. The difference lies in the fact that rather than pay the premiums during the entire term length of the insurance, you will only pay them for a set time. Once this period has concluded, you have already paid the premiums that will guarantee your payout, so you can stop making periodic payments. Your insurance will then be paid off and your coverage fully active, so you can earmark the money you are earning for other things.
This category is very interesting for people who have enough liquid assets available and want to finish paying off their life insurance policy as soon as possible. They take premiums out of the equation and ensure their coverage.
In most other ways, this option will be similar to whole life insurance, the most traditional form. As such, the premiums from this type of insurance generate cash value that accumulates to become part of the future payout, and in addition, will allow the insured to create extra income when the cash value exceeds a certain level.
Cash value is the most interesting part of whole life insurance, since it is designed as a savings strategy. Part of the money that is paid in premiums is placed in a savings account that pays guaranteed interest by the insurance company. The payout is then rounded off with these earnings. But the insured can also use this cash value to take out a loan when he or she needs it (it must be paid back if the insured does not want the amount to be subtracted from the final payout) and can collect it when the law allows it. In addition, taxes are deferred for this type of asset, which makes it very attractive as a way of saving.
How Limited Pay Life Insurance Works
As we have seen, the main difference is in how the life insurance is paid. Otherwise, the process is the same: getting a life insurance quote; going through the qualification process; negotiating terms, death benefit, and clauses; designating beneficiaries; and finally, enjoying the coverage. However, the period during which the insured will have to pay premiums is determined when the policy is underwritten.
Therefore, the distinguishing factors here are the premiums and how they are paid. In general, there are two payment categories:
- A set number of years. You can decide on the number of years during which you will pay premiums. It can be 7, 10, 15, or 20 years. The insured pays the premiums determined by the insurer for this determined time period. Once this time has passed, the contribution of the insured to the policy will be complete and the insured will no longer have to make premium payments.
- A set age. In other forms of limited pay life insurance, the insurer will stop making premium payments after a set age. Typically, this age is 65 years old, the point at which the insured goes into retirement. When the insured turns 65, he or she stops paying premiums, but the coverage will be in effect until death.
The way the premiums are paid is determined next. Insurance companies tend to offer the option of monthly, quarterly, biannual, or yearly payments. Regardless of your payment plan, you should know that the premiums of limited pay life insurance policy are higher than those of conventional permanent life insurance policies.
This difference in price has a logical explanation: the insurer needs to squeeze an amount that you would normally pay over the course of your lifetime into just a few years. This is why the premiums turn out to be higher.
You should also know that just because you are done paying premiums when the fixed period is up does not mean that you will not have any more payments to make. Insurance can always incur maintenance costs and other expenses which you might have to pay.
The rest of the insurance elements are exactly the same as in whole life insurance. To start, you must go through the underwriting process, during which the insurance company will evaluate information such as your age, health status, lifestyle habits, financial status, and other possible insurance coverages. Remember that in this stage, it is possible for the company to ask for reports and medical tests to verify your real health status.
Once the underwriting process is done and the policy has been signed under the terms outlined above, this type of insurance will always offer a payout or death benefit with a guaranteed tax-free payment for your beneficiaries when you die.
In addition, you can choose as many beneficiaries as you want and determine their order of access to the payout. You decide who your primary, secondary, and even tertiary beneficiaries will be. Or, if you prefer, you can name a trust fund as a beneficiary, and the manager will administer the money according to your directions.
This insurance also tends to include certain clauses that can modify the way it functions. Some of the most common clauses of a permanent life insurance are: accidental death benefit clauses, which pay an extra benefit if your death was caused by an accident, or disability clauses, which exempt you from paying premiums if you suffer from a disability that prevents you from working and generating income.
Why You Might be Interested in Limited Pay Life Insurance
Limited pay life insurance offers quite a few advantages that we recommend you consider in order to determine whether this kind of policy is right for you. These are the main reasons to purchase limited pay life insurance:
- Free up money for old age. Since the insurance is paid in just a few years, you can free up money to use when you are older and have less income. You will stop paying premiums and you can allocate this money to other methods of saving or simply enjoy it.
- Produces cash value more quickly. In contrast to temporary life insurance, which is also paid over just a specific number of years, limited pay insurance allows you to generate cash value. This means that it produces an extra benefit that you will receive during your lifetime, and that you can also use the cash value to request loans with very low interest rates, monthly payments, and taxes.
With this type of policy, as the amounts contributed are larger and are paid off more quickly, the cash value grows faster than in normal whole life insurance policies and so is also available to the insured at a faster rate. - Guaranteed coverage. In addition, contrary to term insurance, limited pay life insurance always results in a payout when the insured dies. This way, your potential beneficiaries know that they will collect the benefit no matter what.
- Perfect for children. This is the ideal insurance policy to give to a child as a gift. If you start to pay it when the child is still small, when he or she turns 20 or 30, it will already be paid off and the child will have insurance coverage that will be with them for their entire life. The cash value can also be used to take out a loan and pay for higher education or start up their first business. Finally, the child will have a tax-free income when he or she decides to collect the cash value at an older age.
- Retirement is approaching. If your are nearing retirement and you have never had life insurance, this option allows you to get your hands on one by quickly paying the premiums that you otherwise would have started to pay in your youth. This way, you will have extra money, in the form of cash value, to complement your retirement pension.
- Additional insurance. It is a good idea to have a limited pay life insurance policy as additional life insurance. Many people have more conventional policies, with normal payments, from which they hope to be able to withdraw cash value or a loan to complement their income when they are older and need extra money. But these money withdrawals can reduce the payout if they are not repaid on time. Adding a limited pay life insurance policy to your coverage guarantees that a death benefit will remain intact for your beneficiaries.
Of course, there are some disadvantages that you should be familiar with, too. The first, of course, is the price. Paying higher premiums can make many potential clients think twice before acquiring this type of policy.
In addition, the total cost of coverage can be a little higher for this insurance. This is due to the fact that the insurance company will only be collecting money for a few years, but must keep the coverage active for much longer.
In conclusion, limited pay life insurance can be quite an interesting option for covering your and your beneficiaries’ needs. Before taking out a policy, however, be sure to talk to an insurance agent and ask him or her to explain all of the specifics of these policies to you in detail. This is the best way to avoid the mistakes people make when taking out an insurance policy.