LIMITED PAY LIFE INSURANCE: PROS AND CONS

LIMITED PAY LIFE INSURANCE: PROS AND CONS
LIMITED PAY LIFE INSURANCE: PROS AND CONS

Limited benefit life insurance is a type of whole life insurance that allows you to prepay the entire cost of your coverage over a certain number of years. 

You can opt for limited term life insurance if you have a whole life policy but want to pay the total premiums over a period of time rather than over your lifetime.

What Is Limited Pay Life Insurance?

Limited benefit life insurance is a type of whole life insurance policy that is structured to pay premiums only for a certain number of years.  In other words, instead of paying your insurance premiums indefinitely, you agree to pay them in full over a predetermined period of time. 

With the limited premium life insurance option, you pay premiums in the early years of ownership, but the benefits last for life.

Like any type of life insurance, a limited payment policy has its pros and cons.  Deciding whether it’s right for you depends on your budget and financial goals. 

In this article, we will explain how limited benefit life insurance premiums differ from regular whole life insurance premiums and the types of limited benefit policies.  First, consider life insurance.

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How Does Limited Pay Life Insurance Work?

Some permanent life insurance policies allow you to pay life insurance premiums on a reduced payment plan.  These limited benefit life insurance policies allow you to pay premiums over a period of time (usually 10, 15, 20, or up to age 65), but you get continuous coverage for life. 

Some prefer limited benefit plans because they only have to pay contributions in their best earning years and don’t have to worry about making payments as long as they have a fixed retirement income.

There are several payment structures available when filling out a term life insurance application.  While many opt for monthly or annual premium payments over the life of the policy, it is also possible to choose a quarterly, annual or capped payment option. 

So which one is the best and will give you the most bang for your buck?  We’ll take a detailed look at these options, with a special focus on limited-payment life insurance options.

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Why Don’t the Premiums Add Up On Limited Pay Life Insurance?

When you switch from a standard payment to a capped or lump sum payment, you will find that the total premiums will be less than the standard payment. 

This means that your total outflow in the capped payment option will be less than a regular salary, and even lower in the lump sum option.

This is because the discount rate is applied to all advance payments to the insurer.  The rate depends on the prevailing long-term interest in the market and ranges from 4% to 8% per annum in the past.

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Difference Between Limited Pay And Regular Pay

  • The nature of your source of income plays an important role when it comes to limited vs regular pay.  If you have a steady source of income, it would be beneficial to opt for a regular premium plan as the costs will be spread over several years
  • Limited or regular payment will have different benefits depending on your retirement plans.  If you’re planning to retire early, the limited payment option will help pay off all contributions before your income stream is affected.
  • Many people find it difficult to sustain the financial burden of insurance plans for several years.  A capped pay plan may be suitable for those looking for a convenient and efficient plan, as the financial obligations end sooner
  • The work environment also affects life insurance requirements.  Someone working in an unpredictable environment like defense, mining or oil industry personnel etc. can opt for a limited payout term life insurance policy.  This will help them pay their premiums faster and not feel stressed about the coverage provided by the insurer
  • If you want to spread the tax benefits of insurance premium payments over the following years, then the regular payment option is best for you.

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Benefits Of Limited Pay Life Insurance

  Before you make your final decision on what to buy, you’ll want to learn more about the benefits of limited-payment life insurance.  Here are a few to keep in mind:

  • You are not obligated to pay the premium until you die.  Once you’ve paid your policy in full, you won’t make any more payments, but you’ll be able to keep your coverage.  This is the main benefit and the main reason why consumers consider this coverage.
  • High growth in cash value.  With a limited payout life insurance policy, you will achieve high cash value growth early on.  If this is important to you, there are no other policies that offer the same growth rate.
  • A good way to provide for the family in the future.  You can use this to provide for your family in the future.  Once you finish paying your premiums, your policy will remain unchanged, so your children can enjoy the benefits.

Monetary Value

With a capped lifetime payment, the cash value benefits remain.  Cash value is vital because it allows anyone to get liquidity at any age or at any stage of their life.

Life insurance policyholders can access liquidity through a loan policy, meaning the cash value of their original policy is still earning interest.

Death Benefit

A death benefit is included in all life insurance plans, but a death benefit in addition to life benefits improves whole life coverage.

Most people are familiar with life insurance, which is the cost of insuring your family or designated beneficiary against financial loss in the event of your death. 

However, whole life insurance goes far beyond what most people think of, providing the security of death and life benefits that can help you pay for your living expenses.

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Limited Pay Life Insurance Policy

When a person chooses this option, it is usually because they purchased a whole life policy late in life.  Suppose, however, that you want to receive monthly income from the cash value of your policy or dividend payments in retirement. 

In this case, limited benefit life insurance is a smart alternative because it eliminates the need to pay premiums throughout retirement.

If you are purchasing life insurance before retirement, you should avoid limited benefit coverage.  This is because the younger person has more time to accrue the interest earned on the cash value.  It will simply continue to rise unless there are limits on what you can include in your policy.

Limited Pay Life Insurance Pros And Cons

Pros

  • The most basic benefit of a capped salary for life is what you might call “peace of mind.”
  • You will receive the full death benefit sooner, thus eliminating the risk of losing coverage due to policy lapses.
  • You don’t have to worry about not being able to afford the premiums later in life if the policy is already paid up.
  • This benefit can be especially important for individuals who need to be sure that the policy’s death benefit will be available to their loved ones.

Cons

  • The most obvious and significant disadvantage of a capped lifetime payment is that you have to pay higher premiums.  Depending on the term of insurance and the age of the insured, payments can sometimes be much higher.
  • If you don’t have enough room in your budget to afford a limited benefit policy with the level of death benefit you need, you may have to sacrifice some coverage, stretch your premiums out longer, or cut costs elsewhere to make up the difference.
  • In this scenario, many people are better off choosing a conventional whole life policy or one of the many universal life options available – depending on individual circumstances.
  • Notably, however, some insurers offer capped lifetime policies with term customers providing additional coverage for a specified period (often ten years) after the policy is taken out.

CONCLUSION

Whole life insurance also includes a cash value component or savings account in the policy that grows at a fixed rate set by your insurance provider.  When you pay premiums, a portion of that payment is redirected to your cash value.

With traditional whole life policies, you are required to continue paying premiums as long as you live to keep the policy in effect.  But limited-payment life insurance sets an end date for this requirement.

When you choose capped-payment coverage, you choose the payment term.  This can last for 10 or 20 years, or until you reach a certain age, such as 65. During your term years, you must pay premiums to maintain coverage for life.

References

Limited Pay Life Insurance FAQs

EDITOR’S RECOMENDATION

What Is A Limited Payment Premium Option?

As a policyholder, it is important to evaluate the limited pay and regular pay to make an informed decision when choosing the premium payment option when purchasing a life insurance plan.

The limited premium payment option allows you to pay premiums only during a certain policy period.  You can pay the premiums long before the policy expires.

However, this does not affect the period of validity of the insurance policy.  You will get lifetime coverage for the entire policy term, regardless of the premium payment period.

What Is The Standard Premium Option Payment?

As the name suggests, for most insurance policies, regular premium payments work.  Policyholders must pay premiums throughout the life of the policy to receive lifetime coverage.  The duration of the premium payment is equal to the term of the policy.

What Is Premium Payment Term or PPT?

The premium term of a life insurance policy is the total number of years over which you will pay the premiums.  It can be the same or less than the total term of the contract.  For example, if you want to buy term life insurance for 30 years, the term of the premium may be 30 years or less.  Here 30 years is the policy term for term insurance plan.

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