When it comes time to purchase a limited payment whole life insurance policy, what you’ll find is that many of the best whole life insurance companies will offer limited payment insurance options that allow you to finance a cash value. permanent policy in a specific time frame.
The key is to understand which insurance company is going to offer you the “best” product to meet your needs.
Reading: What is 15 pay life insurance
The following article will help familiarize you with some of the basic terms you’ll want to understand so you’ll be equipped to navigate through the many limited paid life options available.
In addition, the following video provides information on the pros and cons of limited payment permanent life insurance.
limited payment whole life insurance
limited payment life insurance definition:
A limited payment life insurance policy has a set period in which you pay the policy premiums, either for a number of years or up to a specific age. once you reach the target years or age, premiums are no longer required, but the benefits of the policy last for the life of the insured.
Insurers offer various limited payment policies, including
- single premium,
- 7 payments,
- 10 pay,
- 15 pay,
- 20 pay and
- paid life at age 65.
- purchase additional paid insurance
- exit the company and earn interest
- payment of premiums
- receive as cash payment
- pay outstanding interest or balance on an existing life insurance loan
Limited payment policies are often a great option for building high cash value early or for someone who wants to invest a lot of money in a cash value policy for a short period of time.
Typically, these are participating whole life insurance policies, which means the insurance company pays an annual dividend to participating policyholders. the dividend can be used to purchase paid add-ons, further enhancing the policy’s cash value growth.
limited payment whole life vs. term life
Someone beginning their search for limited payment policies is usually curious about the difference between these term and permanent life insurance policies.
Now, whole life vs. term life comparisons aren’t really apples to apples. the products are very different and should be used in different circumstances, for different purposes.
term life insurance
Term life insurance lasts for a specific period of time. once the term expires, the policy ends.
You can choose to renew the policy, but it usually requires you to pay a much higher premium that renews annually, each year getting 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 payment life insurance is a life insurance contract between you (the owner/insured) and the insurance company (the insurer), for the benefit of the beneficiary, that requires you to pay for the policy over a period of certain time.
Once that period has expired, your policy is paid 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.
types of limited payment life insurance policies
Depending on the life insurance company, when considering limited payment for whole life you will have several options to choose from. Different types of limited payment life insurance policies include:
single cousin whole life
single premium life insurance offers permanent coverage that is paid for in a single lump sum payment.
The advantage of the single premium is that you get leverage on your money and many of the benefits inherent in life insurance, such as a tax-free death benefit.
The downside of single premium is that the policy is considered a modified endowment contract and you lose some of the tax advantages of cash value life insurance.
7 pays for life
A 7-payment whole life policy offers permanent death benefit coverage in a policy that pays over 7 years.
the reason the number 7 is significant is because the 7 payment 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 pays for life is the shortest period of time you can choose to overfund your policy without changing the nature of the policy.
10 pay whole life insurance
10 pay life provides permanent coverage that pays for itself over 10 years. this is a very popular option, particularly for those who practice infinity banking with their policy.
You can choose a 10-payment whole life policy with a rider to increase your death benefit coverage while you wait for the whole life policy’s death benefit to grow.
example of 10 whole life insurance quotes
The following sample of 10 paid whole life insurance quotes are from a company rated a+ for a male plus preferred. annual fees are for informational purposes only and must be qualified.
15 pays life
A 15-payment whole life policy provides coverage that lasts your entire life with premiums due for 15 years.
Some people opt for this policy over a 10-payout because the premiums are lower, but you still get the benefit of a policy paid for in a relatively short period of time.
20 pays whole life policy
Another popular option, 20 pay life provides lifetime coverage that pays in full over 20 years.
Some of the major companies offer no-exam whole life insurance with face amounts up to $2,000,000 in a 20-payment policy.
(Note: Other major life insurance companies offer similar accelerated underwriting on different limited payment options.)
example of 20 whole life insurance quotes
The following sample of 20 paid life insurance quotes are from a company rated a+ for a male plus preferred. annual fees are for informational purposes only and must be qualified.
30 pays life
30 pay life provides coverage that lasts your lifetime with premiums due for 30 years.
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The advantage of this policy is that it spreads premiums over 30 years, resulting in more affordable whole life insurance compared to other limited life payment options.
paid life at 65
A limited payout whole life policy to age 65 offers lifetime coverage that converts to a paid policy at age 65. the number 65 is significant because it has been the common retirement age since 1935.
The advantage of life insurance paid at age 65 is that as you enter the retirement stage of life, you no longer have to pay premiums, freeing up your cash for other activities or expenses.
In addition, your life insurance retirement plan is now fully funded, which can be used to help supplement your income in retirement.
whole life insurance up to age 121
Your whole life payout is now not capped, whole life insurance up to age 121 is the longest you can stretch your premium payments.
The advantage of spreading your premium payment is twofold.
one, has lower whole life premiums. Since you’re spreading your payments out over a longer period of time, your whole life insurance rates will be lower.
two, it may be more beneficial to pay for your policy over the long term because your dollar will be worth less in the future. This means that a dollar 10 years from now will be worth much less than today’s dollars.
And a dollar 30 or 40 years from now will be worth even less, so by spreading your payments out over your life you’ll be paying with devalued dollars in the future.
example of whole life insurance quotes up to age 121
hypothetical cash value growth of 10 payments over lifetime
The chart below shows a sample graph of the cash value of whole life insurance based on a policy that was purchased in 1980 by a 50-year-old man. dividend rates were higher then, so past performance is no guarantee of future performance.
Limited Pay Life Insurance Pros and Cons
In the next section we will address the pros and cons associated with a limited payment life policy.
limited payment whole life benefits
no more bonuses:
You pay for the policy for the required amount of time, and in return, you get a paid policy with no more premiums due and all the benefits of cash value life insurance.
You can get a limited payment long-term care life insurance policy. Many limited payment policies provide a long-term care insurance rider and will pay a death benefit, a long-term care insurance benefit, and a cash back premium.
high cash value:
Limited payment life insurance is a great way to boost your policy, giving you high cash value growth in the early years. For those looking to use life insurance like a personal bank, having a rapidly growing cash value is a huge benefit.
limited payment policies can also create a better internal rate of return (irr), providing superior long-term growth compared to ordinary life insurance where you pay premiums until you die.
One of the main reasons is that your policy is paid for and many of the fees associated with it are no longer charged, providing a higher dollar-for-dollar return.
ideal also for children:
Children’s limited payment whole life insurance is a great way to support your children in the future. you can pay for the policy over 10 or 20 years, and your child can get whole life insurance benefits for life.
disadvantages of limited payment for life
This is not cheap whole life insurance. Due to the fast-paying nature of the policy for a limited time, you will pay a higher premium than a policy that has its premium payment schedule extended to 100 years.
However, you can always adjust the initial death benefit amount to lower your premiums. Over time, thanks to your guaranteed return plus potential dividends used to purchase paid-up additions, your policy’s cash value and death benefit will continue to grow.
So what that means is that your policy will continue to work even after your initial payment period.
That way, even though it’s more expensive than the cheapest whole life insurance up to age 100, your policy will pay for a shorter period of time, say, over 10 years or up to age 65. your cash for other uses, rather than paying off your policy for another 30 or 40 years.
modified staffing contract:
It is possible to contract your policy with limited payment for life. In particular, single-premium whole life insurance does not meet the IRC requirements for cash value life insurance, so it is considered a modified endowment contract.
With limited payment policies, particularly those funded by paid add-ons, it’s important to be aware of the mec level where your policy changes from life insurance to a modified endowment contract.
The good news is that the insurance company can help you determine how much you can safely contribute to your policy without it becoming a mec. and if you exceed the mec limit, the insurance provider will notify you. just make sure you open your mail!
advantages of whole life insurance
In addition to the above limited payment pros and cons, some additional whole life pros and cons will follow.
All of life offers several advantages that need to be addressed to get a full picture of why this asset is so valuable in any portfolio focused on building wealth.
We have written extensively about the best whole life insurance policies. But to recap here, whole life offers some fantastic benefits, including guarantees like:
guaranteed death benefit
A whole life policy pays a guaranteed lump sum death benefit to your beneficiary. And with a properly designed policy, the death benefit grows throughout your life, so when that inevitable day comes, your policy has grown as you age, allowing your beneficiary to receive a death benefit. that has continued to grow throughout his life.
Whole life premiums are guaranteed never to increase, meaning the premium is fixed over the life of the policy. and with limited payout life, premiums have an end date, but you continue to receive the benefits associated with a whole life policy.
guaranteed cash value
The cash value of participating life insurance is guaranteed to grow year after year. the policy has a guaranteed interest rate of 4%, plus life insurance dividends, bringing your total dividend rate to 5% or 6% today.
participant vs. non-participant
There are two types of limited payment whole life policies to consider, participating and non-participating.
non-participating whole life
insurance does not pay dividends. At i&e we don’t see much value in these non-dividend-paying whole life policies, as guaranteed universal life insurance likely offers competitive rates for similar permanent death benefit coverage.
We typically recommend a participating whole life insurance policy instead, which offers policyholders the opportunity to participate in company profits through dividends. Dividends are considered premium return and are not normally included as taxable income.
Permanent life insurance dividends can be used to:
Additional Benefits of Cash Value Life Insurance
Whole life insurance is considered cash value life insurance for tax purposes. Cash value policies have very favorable status under the Internal Revenue Code, which offers incentives such as:
Cash value life insurance grows tax-free
The Internal Revenue Code has incentivized cash value policies so that all earnings in the cash account grow tax-deferred. and you may never pay taxes on those earnings if you use the following benefit.
Policy loans are tax free
You can borrow against the cash value of your policy tax-free through life insurance loans. Anytime you need access to your cash value, you can contact the insurance company and request a policy loan, no questions asked. the loan is private and is not reported to the credit bureaus.
you can unsubscribe from your policy tax-free
Cash value withdrawals from your policy up to the basis are tax-free. Your basis is a number that takes into account your contributions to the policy. As long as you don’t take more out of your basis, you can withdraw from your policy without having to pay income taxes on the money.
the death benefit goes to your beneficiary tax-free
Cash received from a lump sum death benefit payment to your beneficiary is not taxable to your beneficiary as income.
If you or your beneficiary choose an option other than the lump sum, interest accrued on the death benefit will be taxed.
However, even in this scenario, the entire death benefit is paid tax-free. only the interest on the death benefit will be taxed as income.
the best limited payment whole life insurance
If we were to design the best limited payment life insurance policy, we would have to take into account several factors that are specific to you.
Since no two people are the same, no two policies are the same.
With that in mind, there are a few extra features to help you put together the best limited pay for life.
limited payment life insurance features such as:
paid additions clause:
Adding a paid rider or additional paid insurance rider allows you to make additional monthly or annual payments on your policy to increase your death benefit and cash value.
Additional cash value growth is compounded by the accumulation of annual dividends paid by the carrier.
Not all companies offer dividends, so it’s important to choose a company that offers a participating limited payout whole life insurance policy.
Participating Limited Payment Whole Life Insurance:
There are two types of whole life policies: participating and non-participating. non-participating policies do not pay dividends.
Participating policies pay an annual dividend that can be used to buy more paid life insurance, pay premiums, earn interest, or put cash in your pocket.
non-direct recognition vs. direct recognition
An indirect recognition company does not take into account an existing policy loan when determining the dividend rate to pay the policyholder.
Direct recognition companies will adjust the dividend it pays to policyholders with an existing loan.
We generally prefer non-direct recognition companies for those who plan to use their policy as a “safe bucket”, borrowing funds to purchase other income-producing assets.
An active policyholder who understands the velocity of money may find that non-direct recognition companies offer a better environment for their transactions.
We know we’ve gone over a lot of information here, but don’t worry because here at i&e we don’t expect you to be an expert on this before you call us.
Our hope is that after reading this article, you’ll be better equipped to ask us a lot of questions.
In certain situations, a limited payment life insurance policy can be a great tool to provide all the benefits of a whole life insurance policy, but without the continuing premium requirement. which for certain clients can be a great advantage!
These policies can be a great tool to help plan for your children’s future or your own retirement planning with life insurance.
The best part is that you won’t be required to pay life insurance premiums in retirement, but you can use the policy benefits to help supplement your retirement income.
When it comes to helping people determine which insurance company will provide the “best” limited payment life insurance option, we here at i&e pride ourselves on having established relationships with multiple insurance companies that we believe represent the “best” of the best”.
So if you’re considering purchasing a limited payment life insurance policy or just have questions about whether one might be right for you and your family, don’t hesitate to give us a call, that’s what we’re here for. !