Comprehensive guide to Limited Pay Life Policy

What is Limited Pay Life Policy?

A Limited pay life insurance policy [ Limited Pay Life Policy ] has a set period in which you pay premiums into the policy, either for a number of years or to a specific age.

Limited pay life insurance policy is a type of whole life insurance that has a shorter guaranteed payment period than a traditional whole life policy.  There are several types of limited pay life insurance policies all with differing guaranteed premium payment periods.  Despite these differences, A limited pay policy do operate under an identical principle.  I will spend time today detailing the various types of limited pay policies available.  Keep in mind that if your policy varies slightly from what I discuss, the same basic principles apply.

When it comes time to shop for a Limited Pay Whole Life Insurance Policy, what you’re going to find is that many of the best whole life insurance companies will offer limited pay life insurance options which allow you to fund a permanent cash value policy in a specific time frame.

Learn More: Life Insurance during a recession – See why life insurance is needed even during bad times

Once you reach the target years or age, premiums are no longer required but the policy’s benefits lasts the insured’s entire life. Insurers offer limited pay policies in single premium, 7-Pay, 10 Pay, 15 Pay, 20 Pay and Life Paid up at age 65.

Limited pay policies are 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. The following answers to questions will help to widen your knowledge, continue reading below.

What is limited pay in term insurance? This option allows you to pay the premium for a limited period, but the life insurance cover continues throughout the policy tenure. The number of years of premium payment is typically lesser than your policy term.

How long does coverage remain on a limited pay life policy? Premiums on limited payment life insurance are paid for a limited number of years, but the benefits last a lifetime. Premiums are payable for 10, 15, or 20 years depending on the policy selected. You can pay premiums monthly, quarterly, semi-annually, or annually. Guaranteed cash value grows tax-deferred.

Who Does Limited Pay Life Insurance Benefit? When an individual chooses this option, it is typically because they have purchased a whole life policy later in life. If you are looking to receive an income during retirement through your policy’s cash value or dividend payment, then limited pay life insurance is an excellent option to prevent having to pay a premium during retirement.

If an individual is purchasing a policy at a younger age, limited pay life insurance is something that should generally be avoided. This is due to the fact that a younger person has time on their side to assist in compounding the interest earned from the cash value. When there are no limitations to what you can pay into your policy, it will just keep growing.

Are Dividends Still Paid On Limited Pay Whole Life? Most limited pay life insurance policies are whole life insurance policies, and the vast majority of those policies are dividend-paying whole life policies.  Given this, it’s easy to understand that many people want to know what happens to the dividend on their whole life policy if it is a limited pay policy.

The answer is you will continue to receive a dividend on a limited pay whole life policy just like you would on a regular whole life policy.  In fact, sometimes this dividend is higher than the dividend earned on a regular whole life policy due to the increased premium amount paid in the beginning for the same amount of death benefit.

Limited pay policies will often earn more dividends in earlier years than regular whole life policies.  Limited pay policies will also continue to receive a dividend after the policyholder pays the required number of premiums to reach paid-up status.  This statement, of course, assumes that the insurance company has profits to pay out to policyholders in dividends, which has been the case for many many years.

Additionally, you should know that all of the dividend options traditionally available on a whole life policy will also be available to you in a limited pay policy.

Can I Still Use The Cash Value On My Limited Pay Policy? A limited pay whole life policy functions identically to regular whole life with respect to using cash value.  The policyholder can withdraw cash value or take a loan against the cash value.  The tax benefits life insurance enjoys are also extended to limited pay policies.

There is no change to this once the policy achieves paid-up status.  The policyholder is still free to access cash value through either a withdrawal or loan.  Withdrawals to the taxable basis and loans will continue to be income tax-free so long as the policy remains in force.

Should You Buy A Limited Pay Life Policy?

The decision to buy a limited pay policy is difficult and requires careful consideration of someone’s unique circumstances and desired outcomes.  Hands down if achieving a guaranteed paid-up death benefit within a specific time period is the number one goal, limited pay policies are the top choice life insurance product.

If your goal happens to be something outside of paid-up status in a short timeline, you should proceed with caution when it comes to choosing limited pay life insurance.  It might work for your needs, but there are could be more ideal options.

Chibuzor Okechukwu

Chibuzor Okechukwu has been a writer for many years and has spent most of his career researching and writing for the personal finance industry. He also write the guidelines to login to various websites and online platforms.

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