Limited Pay Life Policy: Cost, Example, Pros & Cons

Kim Wilhelm CEO of Final Expense Direct Life Insurance
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Written by Kim Wilhelm

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Last Updated 02 Jul 2022

Whole life insurance is a great option for people of all ages looking for permanent coverage with locked-in rates.

But not everyone wants to pay for life insurance until they die.

What if there was another option?

A limited pay life policy could solve this problem for many, but it’s not the right solution for everyone. Here’s what you need to know about limited pay life insurance, including examples, costs, and pros and cons.

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What is a Limited Pay Life Insurance Policy?

A limited pay life insurance policy provides lifelong coverage without a lifelong premium payment. With limited pay life, you only pay for a set number of years or until you reach a certain age.

No, we’re not talking about term life insurance. When you buy term life insurance, you only pay for a certain number of years for life insurance coverage. But when your payments end, so does your coverage.

That is not the case with a limited pay life insurance policy. When you buy limited pay life insurance, your policy stays in force for the rest of your life, even after your policy is paid up.

Types of Limited Pay Life Insurance Policies

There are several types of limited pay life insurance policies to choose from. Here are examples of the types of life insurance policies you may consider.

Single Premium Whole Life Insurance

Single premium whole life insurance offers permanent coverage that is paid in full with one lump sum payment.

While this policy may be a great option for someone who just received a large inheritance or other type of lump sum payment, it’s not without its drawbacks.

Yes, you can get paid up life insurance after making one single payment, but you miss out on some tax advantages others enjoy with cash value life insurance. Single premium whole life insurance is a modified endowment contract, or MEC. 

A single premium life insurance policy fails the 7-pay test as outlined by the IRS, which means your first seven years of payments exceed the premium amount needed to pay the policy over the same timeframe.

The biggest disadvantage of a single premium MEC policy is any withdrawals or borrowing against the cash value is taxed as ordinary income, instead of being tax-free. 

7-Pay Whole Life Insurance

With a 7-pay whole life policy, you pay for the policy for 7 years and then it’s paid up. This policy is a better option for people who want to access their cash value in the future and avoid the MEC IRS rule.

10-Pay Whole Life Insurance

By now, you’ve probably guessed that you pay into a 10-pay whole life insurance policy for 10 years, then it’s paid in full for life.

And you’d be right!

This policy may be a better option than the 7-pay because you’ll avoid it becoming a MEC and your premiums are lower because you’re paying over 10 years instead of 7.

15-Pay Whole Life Insurance

With a 15-pay whole life insurance policy, you’ll pay for 15 years and have permanent coverage.

Like the 10-pay, a 15-pay life policy has lower premiums since you can spread them over more years, but you still have the advantage of a short payment period.

Some companies also offer a 20-pay or 30-pay whole life insurance policy if you want to spread out the premiums over more time.

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Life Paid Up at 65 Insurance Policy

Rather than have a set number of years, you will pay into a whole life paid up at 65 policy until you reach 65. 

This policy is popular for younger generations because they can guarantee their policy will be paid up by the time they hit that magical retirement age of 65. It ensures they have the coverage they need until the good Lord calls them home, but frees up their retirement income for other expenses.

Keep in mind, the closer you are to 65 when you buy this policy, the higher your premiums will be. 

Whole Life Insurance to Age 100 or 121

Whole life insurance to age 100 or whole life insurance to age 121 is not a limited pay life policy. It’s actually the standard whole life insurance policy you’ll buy if you don’t want a limited pay life policy.

Whether the policy is paid in full at age 100 or 121 depends on the company and the specific policy. These policies are paid until death, unless you live past your expected mortality.

While you get lower premiums than limited pay life insurance because they spread the premiums over many years, there may come a time in the future where your income is affected and you struggle to pay the premium. You could face a decision to surrender your policy, use the cash value to pay for it, or sacrifice something else in life to keep your policy in force.

Limited Pay Life Policy Costs

How much a limited pay life policy costs depends on a few things:

  • The amount of years you have to pay into the policy
  • How much coverage you need
  • Your age and health when you take out the policy

The fewer years you have to pay, the higher your premiums. And when you opt for a lower number of payment years, the premium cost is much higher because the insurance company has fewer years to spread out your risk.

Limited Pay Life Policy Pros and Cons

Pros

Paid in Full

After your payment window is complete, your policy is paid in full. That means no more payments for life, but you still get to keep the face amount in force for your beneficiary to receive when you die.

High Cash Value

Limited pay life policies gain cash value faster than traditional policies because the premiums are higher. The part of the premium that goes into the cash value account front loads, which means you can build the cash value faster thanks to guaranteed interest rate growth. 

Great Option for Children and Grandchildren

Limited pay whole life insurance for children is a great option for parents or grandparents. You could take out a 10-pay, 15-pay, or 20-pay when they’re young and pay it in full by the time they’re an adult. They’ll have guaranteed coverage no matter their health status, and the cash value is still available to use as a rainy day fund.

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Cons

High Premiums

One of the greatest disadvantages of limited pay life is the higher premiums. The less time you pay into the policy, the higher your premiums will be. This makes limited pay life out of reach for many on a fixed income, unless they choose a longer payment period.

Risk of MEC

Any limited pay life insurance policy has the risk of becoming a MEC. Since most people use limited pay whole life to access the cash value while alive, it might not be the best choice, unless you want the amount you use taxed as ordinary income.

If you’re interested in a limited pay policy but want to avoid a MEC, discuss it with your insurance carrier first. They can let you know how much you can pay into the policy so it doesn’t become a MEC, and will alert you if you're getting close.

Conclusion

Though limited pay life insurance comes with higher premiums, the pros can outweigh the cons for some. You can enjoy the benefit of having life insurance paid in full without having to worry about budgeting for premiums. However, you should work closely with your insurance carrier to avoid it becoming a MEC, especially if you want a shorter pay period. To learn more about the possibilities of limited pay life, contact Final Expense Direct today.

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