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Defining Modified Whole Life Insurance and Explaining How it Works!

If the thought of high whole life insurance premiums scares you, there’s another option – modified whole life insurance. This insurance policy has lower premiums, but it also has a waiting period which can be as long as 3 years.

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Keep reading to learn if it’s right for you.

What is Modified Premium Whole Life Insurance?

Modified whole life insurance is a whole life insurance policy with a waiting period. During the waiting period, which is usually 2 to 3 years, you have no death benefits. If you die within that time, the insurance company refunds the premiums you’ve paid plus a set interest rate, usually around 8 – 10%.

This type of policy helps people who can’t afford the higher whole life premiums right now but will be able to 5 – 10 years later. After the introductory period, the insurance premiums increase and are then fixed.

The death benefit and even the cash value remain the same throughout the policy – it’s only the premiums that change.

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How Does Modified Premium Whole Life Insurance Work?

If you’re familiar with whole life coverage, you understand modified premium whole life insurance – they have the same premise.

Cash growing up with time

You buy a policy with a specific death benefit. You pay the premiums, and when you die, your loved ones receive the death benefit payout.

But, there’s a catch.

Unlike a permanent life policy, your beneficiaries won’t receive the full amount until you’ve passed the waiting period. Inquire about this period before choosing a policy to ensure it’s not too long.

There are a few other differences too.

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Your premium changes from the ‘modified’ amount to the full premium policy amount after the fixed period. Premiums may be fixed for 5 or 10 years, and it varies by provider. Prepare yourself for a significant increase, though. For some, this is ideal – they can pay the higher premiums when they’re more established but always do the math before deciding.

One other difference is the accumulation of the cash value. While the modified premium whole life policy is in its introductory period, it won’t accumulate a cash value. Once you are in the ‘standard’ premium phase, you’ll accumulate a cash value, but it may not be much since you lost 5 to 10 years of the initial policy.

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Pros and Cons of Modified Whole Life Insurance

Like all insurance policies, there are pros and cons to this policy. Consider the following before deciding:

Lower payments for the first 5 – 10 yearsPremiums are guaranteed to increase
Provides coverage for lifeYou may not have enough time to build a cash value
You may build a cash valueIt’s more complex than traditional insurance
Any money earned in the cash value is tax-deferredThe premiums are higher since it’s guaranteed coverage
Easy to personalize your coverage
No underwriting or very minimal underwriting for guaranteed approval

Who Should (and Shouldn’t) get Modified Premium Whole Life?

Modified whole life insurance is a good option for young people who want life insurance coverage but can’t afford the permanent life insurance premiums yet.

You can lock in the best insurance rates while you’re young and healthy but don’t have to pay the higher whole life premiums for 5 to 10 years when you’re more established and able to afford them.

You can lock in the best insurance rates while you’re young and healthy but don’t have to pay the higher whole life premiums for 5 to 10 years when you’re more established and able to afford them.

It’s a great way to lock in today’s rates but not have to pay the premiums quite yet. You’ll have to pay some premiums (more on the costs below), but not nearly as much as the whole life policy will require.

It’s also great for those who have serious health issues and won’t qualify for a full permanent life policy. The guaranteed coverage means no underwriting, but it also means higher premiums. If you have chronic health issues, though (but not life-threatening), you can lock in coverage and protect your loved ones.

Who shouldn’t?

Anyone with serious health issues who think they won’t make it through the waiting period. If you die within the waiting period, your loved ones only receive the premiums you paid plus a small percentage – it’s not nearly enough to cover your final expenses or leave them with any money upon your passing.

How Much Does Modified Premium Whole Life Insurance Cost?

While everyone will pay different premium amounts on a modified premium whole life policy just like they do for a whole life policy, here’s what you should know.

You’ll pay significantly lower premiums at the front end of the policy.

Let’s say you take out a $1 million modified whole life policy with modified premiums for 5 years. For the first 5 years, you may pay $800 – $1,000 a year in premiums, but after the first 5 years, your premium may jump to $8,000 – $10,000 a year to make up for the years you paid next to nothing for the policy.

You don’t start earning a cash value until you pay the much higher premiums in the 5th year and beyond.

Frequently Asked Questions (FAQs)

Your Question, My Answer

Does modified whole life insurance face amount decrease at certain points over time?

No, the face amount never changes. The premium starts low and increases after your introductory period, but the face amount remains the same.

The amount your loved ones receive may change if you die within the waiting period, though. If you die within the first 2 to 3 years, your loved ones will not receive the full face amount.

Is modified benefit whole life insurance interest-sensitive?

No, a modified whole life policy isn’t interest sensitive. The cash value will increase as you make ‘full’ premium payments, but not during the introductory period. Your cash value will build as you continue making your payments, though.

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Can you cancel this policy and take the built cash value?

Yes, if you cancel the modified benefit whole life insurance plan, you will receive the accumulated cash value. Each insurance company offers different payout benefits, including a reduced paid-up coverage amount or an extended term life insurance policy.

Can a term life insurance policy be converted to whole life?

Yes, many insurance companies offer the option to convert a term life insurance policy into a permanent life insurance. Every insurance company has different requirements and options, but a quick discussion with your insurance agent will let you know your options.

Term insurance isn’t always a great fit, especially as needs change, and that’s where permanent life insurance can create a better option.

Does it have a cash surrender value?

Like basic whole life policies, the modified coverage whole life insurance policy will also have a built-in cash surrender value. This value will accumulate slower but will continue to increase with consistent payments.

What is it used for?

The modified premium whole life policy provides comprehensive protection and coverage for your entire life. It offers a set premium which increases after the first 5 – 10 years.

It’s best for those who can’t afford a whole life policy now but want to lock in their rates while they are young. Just make sure you’re aware of the potential increase after the first 5-10 years of coverage.

Who is modified whole life insurance best for?

A modified whole life policy is best for people looking to protect themselves now but has a smaller amount of money to spend. It also works well for those who know they’ll gain access to funds later on in their lives.

What is the difference between modified whole life and whole life insurance?

The main difference between these two is the premium change. Whole life insurance has the same premiums for the life of the policy, which means higher premiums right from the start. Modified whole premium policies have lower premiums at the beginning of the policy, but then they increase.

Bottom Line

If you love the thought of life insurance but can’t afford the high permanent life insurance premiums, consider a modified premium whole life ins plan. You’ll lock in the rates now while you’re young but don’t have to pay the total premium amounts until you are older and more established.