There are so many things that are happening nowadays and thus buying life insurance that can take care of the needs of your loved ones when you are gone is mandatory. Of course, there are plenty of insurance options you can choose to buy to take care of your future expenses in the event of death.
In this article, we look into what limited pay whole life insurance is and the type of policies you can get on the market.
We will also look at the benefits, the bad side, and the cash value details.
What is Limited Pay Whole Life Insurance?
It is a policy that requires the insured to pay predetermined premiums for some years for a specified period. After they attain a specified age, the insured will no longer need to pay the premiums.
Even though, the death benefits will remain in place until the insured breaths last. Meanwhile, during the period, the cash value and the death benefits will continue to grow even when the insured is not paying any amount.
The most important thing is that you are not required to pay additional premiums once the full amount agreed in the contract is remitted. But the benefits remain in place until you die.
In fact, it is one of the reasons why consumers like the cover. It is the best way to care for your family’s future needs because it helps you to achieve a high growth value.
The policy allows you to choose the number of years you would love to take paying the premiums. If you choose fewer years, you will need to pay a higher premium.
However, you can have the premiums reduced by selecting more years. In most cases, you will continue paying the premiums are until you attain the age of 60 years. Choosing to pay the premiums in a shorter period enables you to accumulate the required cash value faster.
Different Types of Limited Pay Policy
Different companies offer different types of limited pay policies. They include:
It offers permanent coverage but requires a one-time lump sum payment. The good thing about the policy is that it gives you leverage on the amount spent and is tax-free.
The 7 Pay
You pay it up in 7 years after which the insurer will consider the policy as a cash value life insurance. You may choose to pay the policy within 7 years but you can choose to overfund it without changing the policy.
The 10 Pay
It is a coverage that you must pay within 10 years. it is a favorite policy that favors those who want policies that allow for infinite banking. Also, the policy comes with a term rider that increases the death benefits. Note that because of the 10-year duration, the premiums paid for the policy are low.
The coverage is designed to last for the entire lifespan. However, you should pay all the premiums within 15 years. The time frame within which to pay the premium is longer than the 10-year pay but cheaper hence many prefer it.
It is another policy that provides lifetime coverage that should be paid within 20 years. Some providers offer a no exam policy with accelerated underwriting.
This is one of the policies that provide a cover that lasts the entire life. However, you will have to pay the premiums within 30 years. It is affordable since you can spread the payments in 30 years.
Life Paid Up at 65
The coverage offers a policy that lasts the entire lifetime as long as you pay the last premium installment at age 65. The cover is set at age 65 because it is the common retirement age.
It means that the insured will no longer need to make payment after they retire. It frees their funds for other expenses and cash pursuits.
Benefits of Limited Pay Whole Life Insurance
The plan comes with plenty of benefits.
Some of them include:
It reduces the financial burden by allowing payment of premiums for a longer period. Premium payment could end after 10, 12, 20 or 30 years. So if you choose a 10-year tenure, you will pay the premiums for a limited period.
Long -Term Care
You will be entitled to a limited pay but a long term care insurance that may come with a rider and guarantees to pay the death benefit.
High Cash Value
The cover provides an opportunity to supercharge the policy. It thus allows one to grow the cash value.
Increased IRR(Internal Rate of Return)
It creates a better IRR and provides an enhanced long term growth compared to whole life policies where you pay premiums up to the day you breathe your last. The reason for this is that it is a paid policy so the fees related to it may not exist. It also provides a higher return for every dollar spend.
Good for Kids
It is the best for children and allows one to pay policy for either 10, 20 or 30 years but allows the children to reap the benefits for the rest of their life.
You pay no more premiums after the end of the 10 or 20 year period but you will enjoy all the benefits therein.
As it is with many other life insurance covers, the limited pay plan has its drawbacks.
Some of them are:
The policy is more expensive than any other life insurance policy because it requires you to pay the premium within a stipulated period. However, you can adjust the death benefit to help lower the premiums.
Modified Endowment Contract
Many consider it as a modified endowment contract since it does not follow the IRC cash value requirements. Thus it requires that one must check on the MEC level.
The number of policies has limits so it is necessary to talk to a carrier first to help you determine how much to contribute to the policy.
Can’t Determine How Long You Will Live
It is difficult to determine with a precision that you will live for 10, or 20 or 30 years. Some people live for more than 90 years. So, if you don’t outlive the policy what happens? Buying a policy that builds cash to last your entire life could be better.
A limited pay life provides all the benefits you get from a life insurance policy even though you are not required to continue paying the premium up to a certain period. It means that you can use the benefits to supplement your income retirement.
Limited Pay vs Traditional Whole Life Insurance
A limited pay policy helps meet the needs of people who are not interested and ready to pay premiums up to 100 years.
They envisage that anything could happen and make it difficult for them to continue paying the premiums. Also, it may be difficult to continue paying premiums while they are in their retirement.
On the other hand, whole life insurance is a form of policy that allows one to build their cash value up to when they die or hit the age of 100 years.
The traditional whole life insurance has its cash value accumulating at a guaranteed interest rate throughout the term of the policy. You can claim the premiums when the insured dies or reaches the age of 100 years. The policy does not expire and the rate paid will never go up no matter what.
Also, unlike the Limited Pay Whole Life, the traditional whole life covers part of the cash value to allow the insured to borrow against it.
The whole life policy offers several benefits such as guaranteed death benefit, guaranteed premium, guaranteed cash value and many more.
The limited pay plan is of two types the participating and the non-participating. The participating type pays dividends while the non-participating does not pay dividends.
Whole life guarantees a cash value and dividend payment. It means that whole life policies offer competitive rates compared to the limited pay. The insured can use the dividends to purchase additional covers and the cash value grows tax-free.
It is possible to achieve a high cash value in the earlier years in the policy. No other cover offers similar opportunities. Besides, the cash value grows tax-deferred meaning that you may finally not pay the tax on the gains if you make use of the net benefit.
The Cash Value Benefit
Its cash value is an important consideration since it can come in handy at any time. Policyholders can use it to access liquidity in the form of loans.
Also, the cash value associated with a limited pay policy will continue to earn interest making the financial asset values.
Things to note about the cash value
As soon as you sign for the policy, a percentage of the premium you pay will become available to you as a cash value.
Thee is a guarantee that the cash value will grow based on the companies assets. The amount of interest each insurance pays depends on the surrender value. This cash value has protection from law-suits, bankruptcy, and even aliens.
The cash value determines how much you own in the company and entitles you to some dividends.
Who Are Ideal Candidate?
Buying this policy is like buying a whole life policy in your later life. So, if you have an interest in receiving an income through your retirement, or you are in dividend payout and cash value, then the limited life insurance could be the best option for you.
Also, you can purchase the policy at any age. But buying it at a younger age is not the best option. Such persons have plenty of time that can come in handy in cash value with low limitations on what you can pay into your policy.
Note that the policy comes with beneficial features that are non-existent in other covers. The high price premium may make it unsuitable for people in the low-income brackets but it confers more long-run benefits.
Thus, the policy is an ideal one for anyone looking forward to lifetime protection. It is also ideal for people that want to enjoy tax advantage savings and those interested in a guaranteed death benefit.
Although people can never prepare adequately for their death, it is, possible to plan for your beloved one’s lives after you pass away. We advise that you choose an insurance that will leave you with no regrets when you breathe your last.
Thus opt for the limited pay whole life insurance other than the traditional whole life insurance.