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What Is Limited Pay Life Insurance?
What is limited pay life insurance? It’s a policy type structured so that you pay the entire cost of the policy during a limited time period. That way, you don’t have to keep paying after you retire. We’ll explain more about how this works and help you decide whether it’s right for you.
Limited Pay Gives You Lifelong Coverage
Limited pay is a type of whole life insurance. That means the policy will cover you for your entire life, as long as you stay current with your premium payments. Unlike term life, there’s no expiration date or term you could outlive. Your coverage is guaranteed to be there, no matter when you pass away.
Whole life also comes with cash value – a form of savings account attached to your policy. Part of every payment you make goes into the cash value account, where it grows tax-deferred with interest paid by your insurer. That rate is fixed at the time you buy your policy. No matter what happens to interest rates in the interim, your rate is guaranteed and locked in. You can then access that cash value during your lifetime for anything you need.
As that cash value grows over the years, you have options to access and use it:
- Policy loan. Borrow against your cash value with a loan from your insurer. These private loans will not appear on your credit report. Like any loan, you’ll owe interest, but it will be offset by the cash value interest rate you’re earning in the meantime. If you don’t pay back your loan, the insurer will deduct it from the death benefit before they pay it out to your loved ones.
- Partial withdrawal. You can withdraw cash as well, in order to avoid incurring interest on a loan. This does deplete your cash value, which means there’s less there to accrue interest. Many clients prefer a loan so their cash value keeps growing while they use the cash from the loan.
- Surrender value. If you ever decide you do not need a policy anymore, you’re entitled to the cash value (minus any surrender fees) if you surrender (cancel) the policy.
Want to talk to one of our licensed agents about limited pay life insurance? We’re here for you! Call us at (800) 521-7873 and we’ll help you figure out if this type of coverage is right for you, and if so, how much you need.
What Is Limited Pay Life Insurance Good For?
With limited pay, the insurer structures the cost of your entire lifelong policy so that you pay it off in a certain number of years. When that policy is paid up, you’ll have coverage in place for the rest of your life…without making any more payments.
You can select to pay for a certain number of years (7, 10, 15, 20) or until a certain age (65 or 70, for example).
Limited pay coverage works well for:
- Pre-retirees who know they’ll be on a fixed income later in life and might not be able to afford coverage. Pay now, while you have the money, and rest easy later knowing that’s one less monthly bill you’ll have to deal with in retirement.
- Parents who want to start a whole policy for their child. You’ll have coverage in place for them, as well as a cash value account that will grow as they get older.
Rather talk to a real person? We get it. It can be easier to ask “what is limited pay life insurance” than read about it. Call us at (800) 521-7873 and we’ll help you figure out if this type of coverage is right for you.
Benefits & Drawbacks
Like any important financial decision, you should consider the benefit and drawbacks of a limited pay policy. Here are the key points to keep in mind:
Benefits
- Guaranteed level premiums. The price you pay is the same every month, making it easier to budget. Your payments will never increase, even if you develop health issues later in life.
- Guaranteed death benefit. From the first day your policy is active, that death benefit is guaranteed, no matter when you pass away. Even if you haven’t reached the end of your payment period, your beneficiaries will get the full face value of your policy’s death benefit.
- Death benefit is income-tax-free. Your loved ones won’t owe any income tax on the death benefit.
- Faster cash value growth. Because you’re paying off your policy sooner, your cash value will grow faster. That cash value grows tax-deferred with a guaranteed interest rate. You only pay income tax on your gains when you withdraw more from your cash value than you’ve already paid into the policy.
- No payments after your limited pay period ends. Best of all, your payments end but your coverage continues. Pay now, during your working years, so you can enjoy easier budgeting and fewer bills during your golden years, while still leaving a death benefit to your loved ones.
Drawbacks
- Higher payments. The cost of the policy is the same as if you were stretching those payments out over your entire life. However, because you’re paying for your policy in a shorter time frame, those payments are going to be higher. Once you get a quote, make sure you can commit to that payment amount for the full payment period.
- Can’t use cash value to pay premiums. With other types of whole life policies, you can use your cash value to pay your premiums (once enough has built up). That’s not the case with limited pay. In most cases, you can’t use your accumulated cash value to handle your payments.
Rather talk to a real person? We get it. It can be easier to ask “what is limited pay life insurance” than read about it. Call us at (800) 521-7873 and we’ll help you figure out if this type of coverage is right for you.
