What is A 20 Pay Life Policy? Simply put, it is a whole life insurance policy that requires payments for just 20 years. Nonetheless, it will guarantee the death benefit for your lifetime.
Not a bad deal. Here’s why:
You limit your payments. For many people, the prospect of paying for life insurance for the rest of their life is daunting. Who wants to do that?!
A limited-pay product allows you to pay for a limited amount of years. Some products called for 10 years, others call for 20.
Important note: that premium will be higher then one you would pay continuously for the life of the contract. But that makes sense. The company still has to cover its costs for the life of the contract. If you don’t want to pay every year, they have to get some of that money upfront in the form of a higher premium.
What I like about this whole arrangement is that you still get your lifetime guarantee. Whole life insurance is, after all, all about guarantees. Guaranteed premium. Guaranteed death benefit. Guaranteed cash value.
One might think that if you stop paying the premium, you would lose your guarantee. But that is not the case. The premium payment schedule is calculated to secure that guarantee for the lifetime of the contract.
Short-term payment, long-term coverage. That is what limited-pay whole life insurance is all about.
What is A 20 Pay Life Policy? (Explained)
In addition, a 20 pay policy typically is designed to accumulate cash, of which the cash can grow at a fixed or fluctuating/floating interest rate.
This cash may or may not be designed to drive the policy. Some newer variations of whole life like No Lapse Universal Life or GULs or GIULs function like a funding agreement: if you pay your 20 payments as illustrated they payout coverage going to A100, A120, or your entire lifetime, regardless of policy performance such as internal interest rates or internal charges. Some of these policies function like term to maturity.
Considering that we are in a protracted low interest rate environment, there are various options that you can choose. You can treat an insurance company like your personal financial risk trading partner, deciding along with your life insurance agent what types of risks you want to hedge.
What happens with your life insurance policy when you pay off the 20 year period?
The premium skyrockets between 3x-5x the amount you’re paying during the 20 year term.
If you do not want to pay the skyrocketed amount (most people don’t), than you’d have to look into a new policy, that is IF you even qualify for life insurance at that time. You may have health issues you didn’t have 20 years prior.
I’d recommend purchasing a more permanent policy. Paying for a term is like renting life insurance; you lose money. Purchasing a permanent life insurance policy such as a universal life, whole life & 10, 20, or 30 Paid life is like purchasing a home, looked upon as an investment because you gain cash value.
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What happens after 20 years of term life insurance?
If it’s a 20-year term policy, in year 21, the policy does not “go away.” All of the insurance charges inside the policy automatically reset to the maximum actuarial values, and the price skyrockets. So, you’ve been paying $500 a year for the $500,000 policy you bought at age 30. Suddenly, in year 21, the price jumps to $4,700 a year, then $5,600 a year, and so on. This seems outrageous, but that’s how term coverage works. And, of course, if you’re unlucky enough to be diagnosed with kidney cancer or something halfway through year 20, that higher premium’s going to seem like a bargain.
Most term policies also have a “conversion” rider that allows you to convert some or all of your policy to permanent insurance. So, let say you’re in year 20, the premium’s about to increase, but a couple of years ago you had a heart attack, and while you’d like to go buy a new term plan, you can’t because of that health history. Well, if your policy has a conversion option, they’d have to allow you to convert it to a permanent policy. The price is going to jump significantly, but again, you’re uninsurable, so you don’t have a lot of options.
BUT… if you’re in good health, just go buy new coverage