What is a Modified Premium Whole Life Insurance? How Does It Work?

What is a Modified Premium Whole Life Insurance? Modified premium whole life insurance is very related to basic traditional whole life insurance.  The difference between the two products lies in the premium structure of the contracts.

In a traditional whole life insurance policy, premium payments are flat through the life of a policy.  With a modified premium whole life insurance contract, the amount of premium due is lower in the first years of the policy.  This period of lower premiums usually lasts through the first five to ten years of a policy’s life, depending upon the issuing company.  After the period of lower premiums expires, the cost of the policy is typically a bit higher than a traditional level whole life policy for the remainder of the insured’s life.  Premium amounts typically only rise once (this is clearly spelled out in the illustration and policy data page).

A modified premium life insurance policy is mutually beneficial to both the owner and the life insurance company.  The policy is beneficial to the owner because premium payments are lower in the beginning policy years.  Modified premium contracts make sense for life insurance companies because the insured person has the lowest risk of dying during the first years of the policy.  When the risk of an insured dying increases, premium payments are also higher.  A modified premium whole life insurance policy will also typically lead to more money in total being paid to the life insurance company over the course of the policy.  It can be debated whether when adjusted for the time value of money (comparing the net present value of the two policy types) the insurance company makes more with a traditional level premium whole life policy or a modified premium policy, but generally the policies are priced to be about equal from a net of market return perspective.

How Modified Premium Whole Life Work

Modified premium whole life insurance requires a lower premium payment for a set number of years. For example, a policy may allow the customer to buy an insurance policy that has a low payment for five years and a higher payment for the remaining life of the insurance policy. As with other whole life insurance policies, modified premium policies typically offer a tax-deferred cash account as part of the policy.

Face Value Does Not Change

Even though premium payments are lower during the first years of the contract, the face value of the contract remains the same throughout the life of a policy.  If the same two face values are compared, the modified premium product will have lower premium payments than a level product during the first years, and slightly higher payments after the rise in cost.

Cash Value

Modified premium whole life policies have a cash surrender value just like the basic whole life insurance policies do.  Because payments are lower during the first years, the cash value will also accrue at a slower rate, at first, compared to a level premium whole life product.

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Modified premium whole life products are eligible for dividends just like traditional level premium whole life insurance.  Dividend payments are generally lower in the first years because of the smaller cash value, compared to regular whole life.  The dividends can be used for the same purposes as traditional whole life insurance, to pay premiums, purchase paid up insurance, or as income.

Who Is A Modified Premium Product Useful For?

The modified premium whole life products are useful for people who do not have a lot of expendable income for a whole life insurance product now, but will in the future.  The type of person who needs this type of protection also requires the life insurance to stay in effect for their whole life.  Examples of people who may be candidates for a modified premium policy include someone with a growing career who will make more money over time, someone whose kids will no longer need support in the future and spending will decrease, or a family that only has one income earning member but will have another in the foreseeable future.

Modified premium whole life insurance may also make sense for business purposes such as key man or buy-sell insurance.  This is especially true when a business is young and may not have the operating budget that it will have after a few more years of operations.

Another reason modified premium whole life is useful for those on a budget is because obtaining insurance coverage when a person is young is very important.  This is when people are healthiest, and by applying for insurance when healthy they both guarantee that they are are insurable in the future,  and that premium costs will be as low as possible over time because a younger person will most likely achieve a superior health rating from underwriting.  A modified premium product gives an affordable way for people to accomplish these goals, and still provide the same level of protection for their beneficiaries.

What Is A Modified Premium Whole Life Insurance Used For?

Modified premium products have the same uses as traditional whole life insurance.  This includes estate planning, providing for living expenses as beneficiaries, funding retirement, funding an education, or protecting the ability to pay off a mortgage after a death.

The most important thing you must understand about life insurance is that it’s impossible for any one company to be the best option for every person.

Why do we say that?

It’s because life insurance companies compete with each another via price and underwriting.

For example, lets say ABC insurance company excels at insuring diabetics and offers them rock bottom rates. Their underwriting is set up to work that way.

Meanwhile lets say XYZ insurance company isn’t be very fond of diabetics. They might deny them or charge them much higher prices.

If you’re a diabetic, your pocketbook and family won’t appreciate XYZ company because they’ll deny you or at minimum charge you much more than ABC company.

At the end of the day, your best policy would be with whichever company offers the best rates and coverage to a diabetic.

No insurance company can cater to every single health issue. They have to pick and choose where they are competitive for certain health conditions.

So to get the best price you must at all costs work with a broker (aka independent agency) who can shop dozens of life insurance companies. They will match you with whichever one views your health most favorably. That’s where you’ll get the best coverage for the least amount of money.

If you work with what’s called a “captive agent”, they will only be able to sell you the one company they represent. But what if that company dislikes your health issues?

Well too bad you’re out of luck because a captive agent cannot offer you another insurance company.

Be it Choice Mutual or another agency, the only way for you to truly get the best coverage at the lowest rate is by working with an independent agency that will review 15 or more life insurance companies on your behalf.

READ MORE: [Detailed] How to Buy Life Insurance Online Now

Frequently Asked Questions

Below are most of the commonly asked questions and answers about these modified whole life contracts.

If you have a question that isn’t answer here, drop it in the comment box below. Within 48 business hours we will post your question with the answer on this page.

1: What does modified whole life insurance mean? A modified whole life insurance policy is a plan that has a waiting period of 2-3 years before the death benefits are payable. If the insured were to die during the waiting period, the insurance company will only refund premiums paid plus interest. In addition to the waiting period, modified plans also cost more money per month compared to a non-modified plan.

2: Is modified whole life insurance interest sensitive? No, a modified whole life policy is not interest sensitive. It will build up cash value that grows every time you make a payment. In addition, the cash value account earns interest causing it to grow further. You can borrow from the cash value if you need money in a bind.

3: What is a modified premium whole life policy? It’s a whole life policy with a waiting period before benefits are payable. If the insured dies during the waiting period (usually 2-3 years), the insurance company will refund premiums plus interest (usually 10%). After the waiting period is over, the full benefit will pay out for any reason.

4: What is cash value of modified whole life insurance? The cash value will vary based on A) how much coverage you buy B) your month payment and C) the insurance company who issues the policy. When you get your policy, you’ll see a table showing you how the cash value grows over time.

5: How does Colonial Penn modified whole life insurance work? Colonial Penn’s guaranteed acceptance policy is a modified whole life plan, and it’s sold by the unit. The most you can buy is 8 units. During the first two years, Colonial Penn will refund 108% of premiums paid for non-accidental death. After two years, it will pay out the full amount.

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