What is limited pay life insurance?

How long does coverage last on a limited pay life policy?

As a form of permanent life insurance, limited pay life insurance is designed to provide lifelong coverage. As long as contract terms are met and premiums are fully paid over the agreed upon period, a policyholder will be entitled to utilize their policy’s cash value while they are living and beneficiaries will receive a death benefit when the named insured dies. 

That being said, certain life insurance providers put limits on the length of coverage for limited pay life insurance policies. For example, limited pay life insurance contracts may provide coverage up until the age of 100 or—as is becoming more common—120 years.

What is an example of a limited pay life policy?

Limited pay life insurance policies are an especially good option for people investing in a life insurance policy later in life. It enables them to maintain life insurance coverage until they die (i.e. the guaranteed death benefit), while still benefiting from the policy’s cash value while they are alive. 

Let’s look at an example of a 20-pay policy…

Jack is 35 years old and applies for a 20 pay participating whole life insurance policy for $100,000. For the sake of this example, based on his health and lifestyle, he has a predicted death age of 80. 

With his 20 pay policy, he pays annual premiums of $1900 until he is 55 years old (totaling $38,000 total paid). If he had chosen a traditional life pay policy, his premiums may have worked out to $900/year, but he would have had to pay it every year until he died (totaling $40,500 over 45 years). Instead, because he chooses a 20 pay plan, after the 20 years is up, he no longer has to pay his annual premiums. 

Over that 20 year period, the policy has been accumulating a cash value and paying out dividends. He has been storing these dividends away in a retirement account and he will continue to receive dividend payments from the policy even after he’s finished paying his premiums. After he turns 55 he uses the dividends payments to supplement his retirement income and rests easy knowing he still has his guaranteed death benefit of $100,000 without having to pay any more insurance premiums.

In short, by paying for a life insurance policy over a set period of time—say 10 or 20 years—policyholders can pay off life insurance in their high earning years, and set themselves up to receive cash value payouts and dividends in the later years of their retirement without having to pay policy premiums. A limited pay life insurance policy can therefore be helpful in providing income during retirement rather than costing the policyholder money in premiums.

How can I reduce my life insurance premiums?

In addition to selecting payment plan structures, those looking to strategically use life insurance to meet long-term financial goals can reduce premiums and optimize their coverage using a couple of methods. 

Reduced paid-up additions

With paid-up additions, whole life insurance policyholders can purchase additional coverage using their initial policy’s dividends. This method enables you to increase the size of your life insurance policy benefit (and by consequence, its potential to increase in cash value and earn dividends) without increasing your premium payments since these are paid up using dividends.

Enhanced term insurance

Enhanced term insurance uses a combination of whole and term insurance to meet your insurance needs. The insurer sets up a base whole life policy and, using the policy dividends, purchases a term policy that tops up your coverage to your desired amount. Using this combination structure usually ends up being cheaper in premium than if you went for a single whole life policy for the same amount of coverage. 

Reduced paid-up insurance

Reduced paid-up insurance, for its part, allows whole life insurance policy owners to stop paying premiums on their policy by lowering the death benefit. This is a nonforfeiture option that essentially converts the policy’s cash value into a guaranteed death benefit. However, it’s important to remember the death benefit will be reduced to whatever the cash value was at the time of forfeit—it might be much lower than you anticipated, leaving your family with a lower payout. 

Changing your lifestyle

As mentioned, the cost of life insurance is heavily dictated by your personal health and lifestyle choices. By making changes such as increasing your exercise, losing weight, and quitting smoking, your rates may reduce—though insurance companies have waiting periods (i.e. you have to have quit smoking for over a year to be considered a non-smoker again) before you may see better premiums.

How to select a life insurance payment plan

Choosing a payment structure will depend on both your current financial status as well as your future goals. If you don’t want to worry about paying your life insurance premiums in your retirement when you have moved on from your high-income-earning years, you may consider a limited pay option. However, that means you will have to pay higher premiums now compared to if you stretched out the premiums over your lifetime. 

At PolicyAdvisor, we have a team of insurance experts that can review each payment plan and explain how it will apply to your situation, chosen coverage, and financial goals. Book a call with us today to start exploring your options!