Are you planning to buy whole life insurance, but the only thing holding you back is the ability to pay a premium for the rest of your life? Instead of worrying too much, getting a limited pay whole life insurance is wise. Wondering what it is? Let’s understand this type of insurance in detail.
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Table of Content
What is Limited Payment Whole Life Insurance?
This is a policy where you only need to pay a premium for a pre-decided period. Some policy terms may include paying the premium until a specific age instead of the period, like other policies. Once you reach that age or complete the time, you will no longer have to pay premiums.
Unlike the regular term life insurance policies, your death benefits will remain intact until you pass. Additionally, your death benefits and cash value keeps growing even though you don’t pay the premium.
How Does it Work?
As already mentioned, premiums on these insurance policies only last for a predetermined period, but the benefits continue for life. Here’s how the plan works:
- Depending on the policy, you may have to pay premiums for 10, 15, or 20 years.
- Paying the premiums depends on what option you choose – monthly, semi-annually, quarterly, or annually.
- These policies guarantee that your cash value will increase tax-deferred. You can access the cash values during your lifetime.
- The policy you choose may earn dividends. But the insurance company won’t guarantee it. If you receive dividends, it will also accumulate interest. Some of the features of this policy also include reducing future premiums, paying premiums in cash, and purchasing paid-up additional insurance.
- No matter the death benefit amount, your beneficiaries will receive the entire income tax-free.
The eligibility criteria for limited pay whole life insurance differ from one insurance company to the other. The minimum and maximum entry age, terms of premium payment, etc., may vary.
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However, you can customize your limited pay life policy to add more value. The eligibility depends on the features you choose:
Guaranteed Insurability Option
You can now insure your insurability. This option allows you to purchase additional insurance amounts on predetermined option dates. The benefit of this option is, that you don’t have to undergo a medical examination.
Upon marrying or becoming a parent, you may choose the other option, Waiver of Premium for Disability. The eligibility criteria to obtain this type of insurance policy depend on your age and coverage. Your age should be between 0 to 37 years.
On the other hand, the coverage should be from $25,000 to $100,000, but it shouldn’t exceed the amount of your initial plan.
Waiver of Premium for Disability
This preserves your policy if your income is restricted due to a disability. If your sum insured is disabled at least six months before the maturity period, this coverage will waive off the future policy premiums. The eligibility for this option doesn’t involve any coverage value. However, your age should be between 0 to 59 years.
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Approximate Premium and Coverage Value
Different insurance companies have different limited pay whole-life policies. Given below is an example of a 25-year-old in Illinois who wants to take this insurance scheme; the breakdown of coverage value, time, and the premium amount is provided:
For 10 years:
The monthly premium amount starts at $333, and the annual premium at $3,818. This policy offers coverage of $250,000.
For 15 years:
The monthly premium amount starts at $122, and the annual premium at $1,392. This policy offers coverage of $100,000.
For 20 years:
The monthly premium amount starts at $71, and the annual premium at $812. This policy offers coverage of $50,000.
Ideally, you should get the insurance policy as early as possible in your life to enjoy maximum benefits.
Pros and Cons
Some of the benefits of getting a limited pay whole life insurance are as follows:
- Life coverage
You will get coverage for your entire life once this policy starts. The insured will not have to pay premiums once the payment for the policy is complete. However, the coverage benefits last for your lifetime.
- Coverage assurance, tax benefits, periodic payments
The survival benefits increase over time. You also get lifetime coverage from the guaranteed limited premium payment terms. Most importantly, the premium amount doesn’t increase or decrease. Your assured sum remains in the bank, along with all the bonuses accumulated over the years. The insured is also eligible for various tax benefits if he or she has this policy.
- Cash source
If high cash value growth is essential for you, then the limited-payment life insurance will suit your needs. You can meet retirement goals with the cash from this policy.
- Benefit your beneficiaries
Since you pass away after the policy ends, your beneficiaries will receive the full insured amount. It is a huge help, especially with all the divided interests that accumulate apart from the principal sum.
The only downside to this policy is it may be a little expensive for a few people. Compared to traditional insurance policies, the premium amounts are typically higher.
Who Should Get Limited Pay Whole Life Insurance?
The sooner you purchase, the lower your premium amounts will be. That is why it is always better to start as early as possible. This insurance can be beneficial for the following:
- If you are planning to invest in post-retirement schemes.
- If you are the owner of an estate and want to bequeath all your savings and estate to your loved ones, transfer your wealth to these beneficiaries.
- You have just started your career and don’t want to pay a significant premium in the future.
Like traditional insurance policies, this one will also pay you the full policy amount once it matures. This is the entire amount you pay as a premium for 10, 15, or 20 years. It will include bonuses also. Apart from the policy amount, you also get a death risk cover. If you die during or after the policy matures, your beneficiaries will receive the entire policy amount.
How is a whole life policy different from a limited payment policy?
It can be easy to decide the better policy between whole life and limited payment if you are confident about your financial goals. Most importantly, you need to think of your beneficiaries while investing.
Following are some of the main differences between these two policies that you need to know:
- Whole life insurance offers death benefits only. Your beneficiaries only enjoy the benefits if you die while the ongoing policy. Limited payment whole life insurance covers you for life. You get death benefits and lump-sum cash that accumulates during the policy period.
- You can purchase a whole life policy for a specific period like 5,10, 15, or 20 years and pay premiums until the policy matures. In a limited pay policy, you may not have to pay premiums for your lifetime. You choose a predetermined period until you can afford to pay the premium. The coverage, however, will last even after you stop paying the premiums.
- Whole life insurance is more affordable because the premium amounts in limited pay policies are higher.
It is always wise to get insurance policies when you are young. The limited pay whole life insurance is not an exception. Assess your needs and financial capabilities to decide whether this is the perfect life insurance.