Many of the best life insurance companies offer limited pay policies. These limited pay whole life policies allow you to fund a permanent policy in a shorter amount of time. In the following article we will help shed some light on limited pay whole life pros and cons. But first, let’s get some basic definitions out of the way. Life policy.
Limited Pay Whole Life Insurance Defined
Definition: A Limited pay whole life insurance policy has a set period in which you pay premiums into the policy, either for a number of years or to a specific age. 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 the best whole life insurance policies for building early high cash value. Normally they are participating policies, which means the insurance company pays an annual dividend to participating policyholders, which can be used to purchase paid-up additions, further enhancing the cash value growth of the policy.
Limited Pay Whole Life vs Term Life
The comparisons of whole life vs term life are not truly apples to apples. The products are very different and should be used in different circumstances, for different objectives.
Term life insurance lasts for a specified period of time. Once the term expires, the policy ends. You can choose to renew the policy, but it typically requires you pay a much higher premium that renews annually, each year going higher and higher.
With certain term insurance policies you can also convert your term life insurance to permanent life insurance coverage before the term life policy ends.
Limited pay life insurance is a life insurance contract between you (the owner/insured) and the carrier (the insurer), for the benefit of the beneficiary, that requires you to pay into the policy for a set period of time.
Once that period has been fulfilled, your policy is paid up and you do not have to make another insurance premium payment. However, your life insurance remains in force and will pay a lump sum death benefit to your beneficiary when you die.
Limited Pay Life Insurance Policies
Depending on the life insurance company, when considering limited pay whole life you will have several options to choose from. The different types of life insurance policies include:
Single Premium Whole Life
Single premium life offers permanent life insurance that is paid up in a onetime lump sum payment.
The pros of single premium is that you get leverage on your dollars and many of the benefits inherent in life insurance, such as a tax free death benefit.
7 Pay Whole Life
A 7 Pay Whole Life policy offers permanent death benefit coverage on a policy that is paid up in 7 years. The reason the number 7 is significant is because of the 7 pay test found in the internal revenue code determines whether a policy will be considered cash value life insurance or a modified endowment contract.
In other words, 7 Pay Whole Life is the shortest time frame you can choose to overfund your policy without it changing the nature of the policy.