Limited Pay Life Policy

Eric Van Haaften Permanent Life Insurance

Do you know what a limited pay life policy is? If not, you’re in for a treat.

This post will explain everything you need to know about limited payment life insurance policies, including how they work and their benefits.

So, if you’re considering purchasing permanent life insurance, be sure to read on!

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What is limited-pay life insurance?
What types of policies are available?
What are the pros and cons of limited pay life?
Should you buy a limited pay life policy?
FAQ: Limited Pay Life Insurance

What is a Limited Pay Life Policy?

Limited pay life insurance is permanent coverage that allows you to prepay for the entire policy in a set number of years instead of paying over a lifetime.

While primarily sold as whole life insurance, several forms of universal life insurance also satisfy the definition of limited-pay life insurance.

Most limited pay life policies offer a premium schedule between structured 10 or 20 years. Once the premium period ends, no future premiums are required.

Common limited pay life scenarios

The following payment structures are examples of a limited pay life policy.

So, you can structure many different time frames to pay off your policy. But there are some typical durations sold in today’s marketplace.

Single premium whole life and universal life coverage are paid in a one-time lump sum. A single premium insurance policy is considered a modified endowment contract, and you will lose the tax advantages of cash-value life insurance.
7-pay life insurance coverage is paid up in seven years. It also meets the seven pay test in the Internal Revenue Code that determines whether a policy will be considered cash value life insurance or a modified endowment contract.
Ten-pay life insurance provides permanent coverage paid off in ten years. The ten-pay option is mainly for those who practice the popular infinite banking concept with their policy.
20-pay life insurance is paid after twenty years and offers a happy medium between shorter pay scenarios and continuous pay permanent insurance.
Life Paid-up at age 65 can vary in cost depending on the buyer’s age and is paid off at the average retirement age of 65.

If you do not want to make payments for the rest of your life, choose the best payment schedule that fits your needs and budget.

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Limited Pay Life Policy Example

Because limited-pay policies have fewer premiums to reach paid-up status, they need more significant premiums yearly than continuous-pay insurance policies.

John is a 45-year-old male looking to buy a $500,000 universal life policy.

He would need to pay $3,894 per year to age 100
He would have to pay $105,671 with a single premium policy
Our 10-pay life insurance calculator comes up with a premium of $10,688
He needs a payment of $5,577 for a 20-pay life or to have the policy paid up at age 65.

While John must pay more with the limited pay scenarios, the policy will remain in force with no future premiums.

Annuity Arbitrage with your IRA

Sometimes, an Individual Retirement Account (IRA) can strategically fund a limited-pay life insurance policy.

Many affluent people have a substantial portion of these assets in Individual Retirement Accounts (IRAs), which require you to take a minimum distribution.

You can transfer money from your IRA into either a fixed indexed annuity with an income rider or a single premium immediate annuity.

The annuity will provide a steady income stream to fund the premiums, and the policy’s death benefit will pass tax-free to your beneficiary.

Types of Limited Pay Life Insurance

There is no doubt that a limited pay life policy can save you money in the long run.

Many different policies are available, each with its unique benefits and drawbacks.

Some policies offer cheaper limited payments, while others will accumulate more cash value.

Limited Pay Whole Life

Limited pay whole life offers death benefits but also has a cash value that builds up over time.

Whole life is the most popular form of limited pay life because it protects you for your entire life and offers a guaranteed savings account and dividends that accumulate over time.

Unlike other policies, with a limited-pay whole life insurance policy, you will know exactly how many payments you need to make and when the policy will be paid in full.

This makes it an excellent choice for those who want to know precisely what they are spending and when they will be done paying.

Variable Universal Life

VUL is another form of permanent insurance where cash values are invested in sub-accounts containing stocks and bonds.

Variable universal life insurance policies offer a unique way to save for retirement while having protection in case something unexpected happens.

Unlike other types of life insurance, the cash value within your variable universal life policy can change depending on the stock market.

This makes it an excellent option for those who want better earnings potential and the flexibility to change their coverage as their needs change.

However, it’s important to remember that investing in this life insurance policy comes with some market risk.

Indexed Universal Life

IUL invests your cash values in accounts linked to the performance of a financial index such as the S&P 500 Index.

Indexed universal life policies offer a unique way to guarantee growth potential on your cash value while enjoying the flexibility of life insurance.

However, because they are often marketed as a safe investment product, many believe IULs always provide high returns.

In reality, there can be wide variation in the growth rates that different policies achieve.

Guaranteed Universal Life

Guaranteed Universal Life (GUL) policies offer a limited pay option that can help you do just that.

With a GUL policy, you make premium payments for only a certain number of years, after which the policy guarantees lifetime coverage.

GUL can be a great way to ensure you always have life insurance coverage without worrying about future premiums.

These low-cost policies are mainly purchased by people only looking for an affordable death benefit, not cash value accumulation.

limited pay survivorship life insurance

A limited-pay survivorship life policy provides coverage for married couples and does not pay out until the surviving spouse dies.

The death benefit of second-to-die policies can provide a better return on investment than individual coverage.

Survivorship life offers a predictable way to pass tax-free money through a wealth transfer strategy to your beneficiaries.

Many ultra-wealthy families buy second-to-die life insurance for estate planning purposes because their gross estate is so big that it will eventually create an estate tax concern.

Hybrid Long-term Care Insurance

In light of the increasing cost of long-term care, many people are turning to hybrid long-term care insurance policies to secure their financial future.

These policies offer life insurance benefits and long-term care insurance and can be a good option for those who want to protect themselves from the high costs of long-term care.

Hybrid life is a form of permanent coverage with a rider granting you access to part of the death benefit to pay for nursing care.

Pros and Cons of Limited Pay Life

Are you considering buying a limited-payment life insurance policy? If so, you’re not alone.

These policies have become increasingly popular thanks to their low premiums and flexible payment options.

However, before signing up, you must understand the pros and cons of limited-pay life insurance policies. Let’s look at these policies and help you decide if they are right for you.

Advantages of Limited Payment Life Insurance

Limited payments: The most substantial advantage of limited payment policies is achieving paid-up status more quickly.
Faster cash value growth: The cash value multiplies because you pay for your policy upfront. By building up the cash value sooner, you can earn more interest over time because of the magic of compound interest.
Higher-income potential: These policies can produce higher income for those looking to use life insurance as a source of retirement income.
Policy loans: For those looking to use life insurance as a personal bank, limited pay life allows beneficiaries to withdraw some cash value or take a policy loan against it.
Increased IRR: Limited pay policies may also create a better internal rate of return, providing exceptional long-term growth compared to continuous pay permanent coverage.
Stand the test of time: You can cover the premiums upfront before your income decreases in retirement.
Tax-free death benefit: Your beneficiary will receive a tax-free death benefit when you die.
Long-term nursing care: Many limited-pay policies provide long-term care insurance riders and will pay death and long-term care insurance benefits.

Drawbacks to Limited Pay Whole Life

Price: Because of the larger upfront payments, many buyers may be unable to afford the initial cost of a limited pay life. If these premiums are too high, you should consider more extended pay periods to lower your payments.
Modified Endowment Contract: Single premium policies do not meet the IRC requirements of cash value life insurance, so it is considered a modified endowment contract.

Buying a Limited Pay Life Policy

Limited payment life is an excellent option for people who want peace of mind, knowing that their loved ones are taken care of without worrying about ongoing payments.

Limited pay whole and universal life insurance offers lifetime protection, so it’s best for people who need to cover long-term financial needs.

Overfunding life insurance can be a great investment strategy for younger buyers wishing to accumulate cash values inside a Life Insurance Retirement Plan.

Many seniors buy limited pay policies because they accumulate cash value, provide a guaranteed death benefit, and can help with long-term care expenses.

If you don’t need a policy paid up in a short timeline, you can continuously pay your permanent insurance premiums yearly.

There may be superior options available for investment-savvy buyers by investing the required additional premiums in mutual funds, stocks, and bonds.

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FAQ: Limited Pay Life Insurance

What’s the difference between a whole life and a limited pay policy? A whole-life policy necessitates premium payments throughout your life, while a limited-pay policy requires premiums to be paid for a specific period.

What is the duration of a limited-pay life insurance policy? A limited-pay life insurance policy requires premiums to be paid for a specific number of years, but the coverage remains in effect for the entire lifetime. The premium payments are made for either 10, 15, or 20 years and accumulate cash values that grow tax-deferred over time.

What is a 20-year limited payment whole-life policy? A 20-year limited payment whole-life policy requires you to make premium payments for 20 years. After these 20 years, no further premium payments are needed, but the coverage and benefits continue for the rest of your life.

Is 10-pay life insurance a worthwhile investment? Yes, by consistently making your premium payments on time, you can ensure the security of the death benefit and enjoy peace of mind. The death benefit will not be lost unless you cancel or surrender your policy. Additionally, a 10-pay policy allows for rapid cash value accumulation on a tax-deferred basis.