When it comes time to shop for Limited Pay Life Insurance Policy, what you’re going to find is that many of the premier mutual insurance companies will offer limited pay life insurance options which allow you to fund a permanent cash value policy in a specific time frame.
The key is to understand which life insurance company is going to offer you the “best” product to meet your needs.
The following article will help familiarize you with some of the basic terms to understand so you will be equipped to navigate through the various limited pay life insurance options available.
Additionally, the following video provides insight into the pros and cons of limited pay life insurance.
Limited Pay Life Policy
Limited Pay Life Insurance Definition:
A Limited pay life insurance policy is permanent life insurance that has a set period in which you pay premiums into the policy, either based on a number of years or based upon reaching a specific age. Once you reach the target years or age, no more life insurance premiums are due, but the policy continues to remain in force for the insured’s entire life.
Insurers offer several limited pay policies, including
- Single premium,
- 7-Pay,
- 10 Pay,
- 15 Pay,
- 20 Pay and
- Life Paid up at age 65.
A limited pay life policy is typically a great choice for building early high cash value or for someone who wants to put a lot of money into a cash value policy over a short period of time.
A limited pay life policy is participating whole life insurance policies, which means the insurance company pays an annual dividend to participating policyholders. The dividend can be used to purchase paid-up additions, further enhancing the policy’s cash value growth.
Limited Pay Life vs Term Life
Usually someone beginning their search for a limited pay life policy are curious as to the difference between these and term life insurance.
Now, the comparisons of whole life vs term life are not truly apples to apples. The products are very different and should be used in different circumstances, for different objectives.
Term Life
Term life insurance lasts for a specified period of time. Once the term expires, the policy ends.
You can choose to renew the policy, but it typically requires you pay a much higher premium that renews annually, each year going higher and higher.
With certain term insurance policies you can also convert your term life insurance to permanent life insurance coverage before the term life policy ends.
Limited Pay
Limited pay life insurance is a life insurance contract between you (the owner/insured) and the carrier (the insurer), that pays out a death benefit to the named beneficiary, and requires you to pay into the policy for a set period of time.
Once that period has been fulfilled, your policy is paid up and you do not have to make another insurance premium payment.
However, your life insurance remains in force and will pay a lump sum death benefit to your beneficiary when you die.
Types of Limited Pay Life Insurance Policies
Depending on the life insurance company, when considering limited pay whole life you will have several options to choose from.
The different types of limited pay life insurance policies include:
Single Premium Whole Life
Single premium life insurance offers permanent coverage that is paid up in a onetime lump sum payment.
The pros of single premium is that you get leverage on your dollars and many of the benefits inherent in life insurance, such as a tax free death benefit.
The con to single premium is the policy is considered a modified endowment contract and you lose some of the tax advantages of cash value life insurance.
7 Pay Whole Life
A 7 Pay Whole Life policy offers permanent death benefit coverage on a policy that is paid up in 7 years.
The reason the number 7 is significant is because of the 7 pay test found in the internal revenue code determines whether a policy will be considered cash value life insurance or a modified endowment contract.
In other words, 7 Pay Whole Life is the shortest time frame you can choose to overfund your policy without it changing the nature of the policy.
10 Pay Whole Life Insurance
10 Pay Life provides permanent coverage that is paid up in 10 years. This is a very popular option, particularly for those who practice infinite banking with their policy.
You can choose a 10 Pay Whole Life Policy with a term rider to increase your death benefit coverage while you wait for the death benefit of the whole life policy to grow.
Sample 10 Pay Life Insurance Quotes
The following sample Life Insurance Quotes are from an A+ rated carrier for a preferred plus male. Annual Rates are for informational purposes only and must be qualified for.
| Age | $100,000 | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|---|
| 40 | $3,628 | $8,717 | $17,225 | $34,170 |
| 45 | $4,297 | $10,310 | $20,360 | $40,370 |
| 50 | $5,082 | $12,167 | $24,010 | $47,590 |
| 55 | $5,979 | $14,272 | $28,140 | $55,740 |
| 60 | $6,973 | $16,565 | $32,610 | $64,530 |
| 65 | $8,075 | $19,077 | $37,490 | $74,100 |
15 Pay Whole Life
A 15 pay whole life policy provides coverage that lasts your entire life with premiums due for 15 years.
Some people opt for this policy over a 10 pay because the premiums are lower but you still get the advantage of a paid up policy in a relatively short period of time.
20 Pay Whole Life Policy
Another popular choice, 20 Pay Life provides lifetime coverage which is fully paid up in 20 years.
A few top carriers offer no exam whole life insurance with face amounts up to $2,000,000 on a 20 pay policy.
(Note: other top whole life companies offer similar accelerated underwriting on the different limited pay options).
Sample 20 Pay Life Insurance Quotes
The following sample Life Insurance Quotes are from an A+ rated carrier for a preferred plus male. Annual Rates are for informational purposes only and must be qualified for.
| Age | $100,000 | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|---|
| 40 | $2,277 | $5,342 | $10,470 | $20,660 |
| 45 | $2,698 | $6,312 | $12,365 | $24,390 |
| 50 | $3,200 | $7,462 | $14,600 | $28,770 |
| 55 | $3,797 | $8,817 | $17,235 | $33,930 |
| 60 | $4,580 | $10,582 | $20,645 | $40,600 |
| 65 | $5,536 | $12,730 | $24,795 | $48,710 |
30 Pay Life
30 Pay Life provides coverage that lasts your entire life with premiums due for 30 years.
The pro with this policy is you stretch out the premiums for 30 years, resulting in more affordable whole life insurance in comparison to the other limited pay life options.
Life Paid Up at 65
A limited pay whole life policy to age 65 offers lifetime coverage which becomes a paid up policy at age 65. The number 65 is significant because it has been the common age of retirement since 1935.
The pro of paid up life insurance at 65 is that upon entering the retirement stage of life you no longer have to pay premiums, freeing up your cash for other pursuits or expenses.
In addition, your life insurance retirement plan is now fully funded, which can be used to help supplement your income in retirement.
Whole Life Insurance to Age 121
A typical question someone considering a limited pay life policy will ask is if this type of policy is the best choice. And the answer to that question will be determined by your specific needs and goals.
As an alternative to limited pay, whole life insurance to age 121 is the longest you can stretch out your premium payments. The advantage of extending your premium payment out is twofold.
One, you have lower whole life premiums. Since you are stretching your payments out over a longer period of time, your whole life insurance rates will be lower.
Two, it may be more beneficial to pay into your policy over the long time frame because your dollar will be worth less down the road. This means that a dollar in 10 years from now will be worth much less than today’s dollars.
And a dollar in 30 or 40 years from now will be worth even less, so by stretching out your payments over your lifetime you are paying with devalued dollars down the road.
The best way to determine what policy will be best between limited pay life policies and some other type of permanent life insurance would be to talk to a pro, such as the team at Insurance and Estates, who can help guide you to the best product for your specific objectives.
Sample Whole Life Insurance to Age 121 Quotes
| Age | $100,000 | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|---|
| 20 | $83 | $151 | $293 | $580 |
| 25 | $92 | $178 | $348 | $689 |
| 30 | $105 | $216 | $422 | $839 |
| 35 | $121 | $267 | $522 | $1038 |
| 40 | $141 | $326 | $639 | $1273 |
| 45 | $173 | $401 | $789 | $1571 |
| 50 | $214 | $499 | $982 | $1959 |
| 55 | $270 | $629 | $1239 | $2473 |
| 60 | $324 | $802 | $1582 | $3158 |
| Age | $100,000 | $250,000 | $500,000 | $1,000,000 |
|---|---|---|---|---|
| 20 | $56 | $132 | $255 | $504 |
| 25 | $66 | $156 | $304 | $602 |
| 30 | $79 | $188 | $368 | $729 |
| 35 | $96 | $230 | $450 | $894 |
| 40 | $115 | $278 | $544 | $1081 |
| 45 | $143 | $350 | $685 | $1364 |
| 50 | $175 | $429 | $843 | $1681 |
| 55 | $223 | $549 | $1082 | $2158 |
| 60 | $280 | $700 | $1381 | $2756 |
Hypothetical 10 Pay Whole Life Cash Value Growth
The following chart shows a sample whole life insurance cash value chart based on a policy that was taken out in 1980 by a 50 year old male. Dividend rates were higher back then so past performance is no guarantee of future performance.
Limited Pay Life Insurance Pros and Cons
In the following section we will address the pros and cons associated with a limited-pay life policy.
Limited Pay Whole Life Benefits
No more premiums:
You pay into the limited payment life insurance for the required time and in return, you get a paid up policy with no more premiums due and all the benefits of cash value life insurance therein.
Long-term care:
You can get a limited pay long term care life insurance policy. Many limited pay policies provide long-term care insurance rider and will pay a death benefit, long term care insurance benefit or chronic illness benefit, and cash surrender return of premium.
High Cash Value:
Limited pay whole life is a great way to supercharge your policy, giving you high cash value growth in the early years. For those looking to use life insurance as a personal bank, having your cash value grow quickly is a huge benefit.
Increased IRR:
Limited pay policies may also create a better internal rate of return (IRR), providing superior long-term growth in comparison to ordinary whole life that you pay premiums on until you die.
One of the primary reasons is your policy is paid up and many of the fees associated with it are no longer taken, providing a higher return dollar for dollar.
Great for kids as well:
Limited pay whole life insurance for children is a great way to provide for your kids into the future. You can pay into the policy for 10 or 20 years and your child will be able to reap the benefits for of whole life insurance for their entire life.
Drawbacks to Limited Pay Whole Life
Price:
This is not cheap whole life insurance. Due to the rapid nature of paying on the policy for a limited time you will pay a higher premium than a policy that has its premium payment schedule stretched out to age 121.
However, you can always adjust the initial death benefit amount to lower your premiums. Over time, thanks to your guaranteed return plus potential dividends used to purchase paid up additions, your policy cash value and death benefit will continue to grow.
So, what that means is your policy will continue to work for you even after your initial payment period.
That way, even though it is more expensive than the cheaper whole life insurance to age 100, you will be paying into your policy for a shorter period of time, say for 10 years or to age 65. And this will free up your cash for other uses, rather than pay into your policy for another 30 or 40 years.
Modified Endowment Contract:
It is possible to MEC your policy with limited pay whole life. In particular, single premium whole life insurance does not meet the IRC requirements of cash value life insurance, so it is considered a modified endowment contract.
With limited pay policies, particularly those that are funded using paid up additions, it is important to keep an eye on the MEC level where your policy changes from life insurance to a modified endowment contract.
The good news is the insurance carrier can help you in determining how much you can safely contribute to your policy without your policy becoming a MEC. And if you go over the MEC limit, the insurance provider will alert you. Just make sure to open your mail!
Additional Whole Life Insurance Advantages
In addition to the limited pay pros and cons above, some additional whole life insurance pros and cons will follow.
Whole life offers several advantages that need to be addressed in order to get a complete picture of why this asset is so valuable in any portfolio focused on wealth building and asset protection.
We have written extensively on the best whole life insurance policies. But to recap here, whole life offers some fantastic benefits, which include guarantees such as:
Guaranteed Death Benefit
A whole life policy pays a guaranteed lump sum death benefit to your beneficiary. And with a properly designed policy, the death benefit GROWS over your lifetime, so when that inevitable day arrives, your policy has grown as you aged, allowing your beneficiary to receive a death benefit that has continued to grow over your lifetime.
Guaranteed Premium
Whole life premiums are guaranteed to never increase, i.e. the premium is fixed for the life of the policy. And with limited pay life, the premiums have an end date, but you continue to receive the pros associated with a whole life policy.
Guaranteed Cash Value
Participating life insurance cash value is guaranteed to grow year over year. The policy has a guaranteed 4% interest rate, plus life insurance dividends, increasing your total dividend rate to 5% or 6% presently.
Participating vs Non-Participating
There are two types of limited pay whole life policies to be aware of, participating and non-participating.
Non-participating whole life insurance does not pay dividend payments. We at I&E do not see much value in these whole life policies that do not pay dividends, as guaranteed universal life probably offers competitive rates for similar permanent death benefit coverage.
Instead, we typically recommend a participating whole life insurance policy, which offers policyholders the chance to participate in the company’s profits through dividends. Dividends are considered return of premium and are normally not included as taxable income.
Whole life insurance dividends can be used for:
- Purchasing additional paid up insurance
- Leaving with the company and earning interest
- Paying premium payments
- Receiving as a cash out payment
- Paying down outstanding interest or balance on an existing life insurance loan
Additional benefits of cash value life insurance
Whole life insurance is considered cash value life insurance for tax purposes. Cash value policies have a very favorable status under the internal revenue code, which offers incentives such as:
Cash value life insurance grows income tax free
The Internal Revenue Code has incentivized cash value policies so that all gains in the cash account grow tax deferred. And you may never pay tax on those gains if you utilize the next benefit.
Policy loans are income tax free
You can borrow against your policy’s cash value income tax free through life insurance loans. Anytime you need to tap into your cash value you can contact the carrier and request a policy loan, no questions asked. The loan is private and is not reported to credit agencies.
You can withdraw from your policy tax free
Cash value withdrawals from your policy up to the basis are income tax free. Your basis is a number that takes into account your contributions into the policy. As long as you do not take out more than your basis, you can withdraw from your policy without having to pay income tax on the money.
The death benefit goes to your beneficiary income tax free
The cash received from a lump sum death benefit payout to your beneficiary is not taxable to your beneficiary as income.
If you or your beneficiary elect an option other than lump sum, any interest accrued on the death benefit will be taxed.
However, the even in this scenario, the total death benefit is paid income tax free. It is only the interest on the death benefit that will be taxed as income.
The Best Limited Pay Life Insurance
If we were to design the best limited pay life insurance policy it would need to take into account several factors that are specific to you.
Since no two individuals are the same, no two policies are the same either.
With that in mind, there are some additional features that will help you put together the best limited pay whole life.
Limited Pay Life Insurance Features such as:
Paid Up Additions Rider:
Adding a paid up additions rider or paid-up additional insurance rider allows you to make additional monthly or annual payments into your policy to increase the death benefit and cash value.
The additional cash value growth is further compounded through the accumulation of annual dividends paid by the carrier.
Not all carriers offer dividends, so it is important you go with a company that offers a participating limited pay whole life insurance policy.
Participating Limited Pay Whole Life Insurance:
There are two types of whole life policies: participating and non-participating. Non-participating policies do not pay a dividend.
Participating policies pay an annual dividend that can be used to purchase more paid-up life insurance, pay premiums, earn interest, or put cash in your pocket.
Non Direct Recognition vs Direct Recognition
A non-direct recognition company does not take into account an existing policy loan when determining the dividend rate to pay the policyholder.
Direct recognition companies will adjust the dividend it pays to policyholders with an existing loan.
We typically prefer non direct recognition companies for those who plan on using their policy as a “safe bucket”, borrowing funds to purchase other income producing assets.
An active policyholder who understands the velocity of money may find that non direct recognition companies offer a better environment to conduct their transactions from.
Now…
We know that we’ve gone over a lot of information here, but don’t worry because we here at I&E don’t expect you to be an expert on this before you give us a call.
Our hope is only that after reading this article, you’ll be better equipped to ask us any and all questions you may have.
After all…
In certain situations, a limited pay life insurance policy can be a great tool to provide all the benefits of whole life insurance policy but without the ongoing premium requirement. Which for certain clients can be a huge plus!
Additionally…
These limited pay life policies can be a great tool to help one plan for their children’s future or one’s own retirement planning with life insurance.
And…
The best part is you won’t be on the hook for life insurance premium payments in retirement but you can use the policy benefits to help supplement your retirement income.
This is why…
When it comes to helping folks determine which insurance company will provide you with the “best” limited pay life insurance option, we here at I&E pride ourselves in having established relationships with multiple insurance carriers who we feel represent the “best of the best”.
So, if you are considering possibly purchasing a limited pay life insurance policy or simply have questions about whether or not one might be right for you and your family, feel free to give us a call, that’s what we’re here for!
I am going to purchase life insurance. I am going with a term policy, but I am contemplating if I should go with a whole life policy, I could convert into a whole life before the term expires, but in the long run, would it be cheaper to get whole life right away?
Make sure the company you are contracting with for term life offers whole life conversions. Certain whole life companies are going to have far superior options than others so you might want to take that into consideration when choosing your term life company.
It will be cheaper to get whole life right away rather than waiting 10 years or more down the road primarily due to the premium payment difference going up significantly once you reach 40. Term is cheap while you are young but gets more and more pricey as you age. If you lock into a whole life policy now you pay a lower premium. Plus, you can choose a limited pay policy and not have to make premium payments later.
One question you need to ask is, “am I going to live 20-30 more years or am I going to outlive my term policy?” Whole life is the optimists life insurance policy because you know you are going to live well into your 90s so having a policy that builds cash value and lasts your whole life is the far better choice. Unless of course, you die young.
Send me lowest quotes for Lafayette whole life insurance for 58 yr old male and 54 yr old woman to my email only. Do not call me.
Hi Lydia,
Thank you for stopping by. We hope you are finding the site informative.
We will send you an email from @insuranceandestates.com. Please keep an eye out for it.
Sincerely,
I&E
Please send me lowest quotes for Lafayette 10-yr. limited pay whole life insurance with PUAs for 30-yr. old woman standard and preferred rates to my email only.
Hello Agatha, we’ve passed your request to one of our Pro Client guides. If you haven’t yet connected, reach out to barry@insuranceandestates.com.
Best, I&E
Hey , can someone contact me to go over the different companies and decide the best fit for whole life insurance for me .
Thanks 😊
Hello Samantha, I suggest you check in with Barry Brooksby to get started. You can connect with him at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
Which one is better? Limited Permium pay up to age 23 for kids and up to age 68 for adults or premium pay up to age 121.
Age kids 7 and 10, adults 33 and 43
Thank you
Hello, the best thing to do is get some real numbers by connecting with our limited pay expert Barry Brooksby. You can connect with him directly at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E
whole life for 10 years please sends me the information
male born in 1952.
thanks
Hello Henry, if you would like information go ahead and request a call from Barry Brooksby at barry@insuranceandestates.com.
Best, Steve Gibbs for I&E