Which of the following is an example of a limited-pay life policy?
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
UPDATED: Apr 4, 2022
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Quick Facts
A limited-pay life policy requires the policyholder to pay premiums for a limited number of years, but its coverage last a lifetime.
7-pay life insurance, life paid up to 65, and policies with pre-determined time frames are some examples of a limited-pay life policy.
The limited-pay life policy is most suitable for people close to their age of retirement.
Limited-pay life policy is one of the most preferred insurance options in the current age, as people tend to choose policies that will offer significant financial growth. As the name suggests, the limited-pay life policy requires the policyholder to pay the dues for a limited number of years rather than keep paying for an extended period.
Therefore, even if you finish paying the amount within a few years, the benefits of such a policy are long-term and enough to last a lifetime. However, there are several different types of policies available in the current market that you can choose. These policies require careful consideration of features like the period, amount, affordability, and insurance pay-out.
If you are considering buying a limited-pay life policy, you need to understand what it is, how it works, and its advantages in the long run.
Introduction to Limited-pay Life Policy
A limited-pay life policy is a type of whole life insurance policy in which the policyholder pays only for a specified and pre-agreed duration. Its payment term is significantly shorter than the term of the policy.
It also means that once the payment tenure expires, the insured person is not liable to pay dues or any additional amounts. The limited pay life policy provides the insured person comprehensive coverage for the entire policy term irrespective of the payment term.
This might seem great at first glance, but a limited-pay life policy has its pros and cons. The feasibility of this policy depends on your budget, practical financial goals, age, and other requirements.
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How does the limited-pay life policy work?
A regular insurance policy requires you to pay over an extended period till the policy matures. The growth of your policy is determined by the period over which you pay the premiums.
However, a limited-pay life policy has you pay for the entire policy cost over a specific time of your choice and convenience. Therefore, it means that the cash value of your finances continues to grow regardless of the shorter payment duration.
Limited-pay life policy provides you options of different time frames that you can choose from for your policy. Most people choose to pay the amount over 10, 15, or 20 years. Since this type of policy is suitable for senior citizens, they can also choose to stop payment at specific ages according to their requirements. The premium is adjusted according to the decrease or increase in duration.
For example, if you buy a term plan for 15 years with a limited pay option, you can choose to pay off the dues before that term, i.e., 10 years for reference. So, you will be required to pay only for the next 10 years since the date of issuance. After that, you are not responsible for conducting any further payments as your policy cost is covered. However, your limited-pay life policy coverage will continue for 15 years.
You can choose to pay in monthly, quarterly, semi-annual, or annual instalments. Depending on your insurance company, you can even make a one-time payment or pay a lump-sum amount.
Which of the following is a limited-pay life policy?
To closely understand the distinction between regular policies and limited-pay life policies, here are a few examples of different types of insurance policies. These details provide an insight into which of the following is a limited-pay life policy and provide an example of a limited-pay life policy.
Standard Whole Life Insurance
It is a type of permanent life insurance where the insured gets covered for their entire lifetime. The only requirement is that the insured pay their premiums on time. Most standard whole life insurance policies offer the insured coverage up to age 121. It means that you might be required to pay the premiums until you reach the age of 121.
In case of your death, the policy terminates, and the insurance is paid to your beneficiaries. The cash value increase of such a policy depends on a fixed rate of interest.
For example, if a person buys a standard whole life insurance policy of $30,000, they are insured for that amount. Their payments will be accumulated over time. However, if the person has paid $15,000 in cash value and then passes away, the insurance company pays the full death benefit of $30,000 to the beneficiaries.
Policies With a Predetermined Time Frame – 10, 15, 20 Years
These incremental limited pay life insurance policies require you to pay the coverage for any duration between 10 and 30 years. You can customize this time frame according to your requirements and depending on when you want to stop paying.
As these amounts are to be paid over a short period, the shorter the pay period, the more expensive your premium will be. Such types of policies also offer growth in cash value and dividends. Even though the rate is for a limited time, the coverage will last your entire life.
Generally, if you buy this policy of $100,000 for 10 years, the amount may start from around $260 a month. If you choose the same amount for 15 years, the amount may differ to around $190 a month. If you want to get the policy for an even longer duration, i.e., 20 years, your monthly cost becomes even lower. It may start from around $157 a month.
7-pay Life Insurance
This limited life insurance policy requires the insured to pay premiums over seven annual instalments. It offers people cash value growth and permanent death benefit protection; even though you pay only for seven years, the coverage lasts for a lifetime. It is also a good policy option for people who need an additional source of monthly income. Since there is a fixed duration of this policy’s payment, the amount to be paid is determined by the coverage value of the policy.
Life Paid Up To Age 65
Senior individuals who do not want to worry about paying insurance instalments in retirement can choose the life paid up to 65 policy. It is also a popular option among people who want to use the cash value as additional income for retirement. You can customize the policy to match your actual retirement age, even though the policy name mentions 65 years.
Your insurance company may allow you to change the policy to 67, 72, or your early retirement age. The annual premiums for this policy generally depend on your age during policy purchase and your overall health. If you buy this policy early on, your rates will be lesser. The policy also offers death benefits and cash value components.
For example, if you are 55 years of age when buying this policy, you have 10 years until retirement. Depending on your coverage amount, i.e., $50,000, you will have to pay an annual amount of around $5,000 for 10 years. Your policy remains in full force till your death once the payments are complete. Later, the full sum is disbursed to your beneficiaries
From the above list of policies, all except standard whole life insurance are examples of limited pay life policies as they have a limited, but customizable period for payment.
Advantages of Limited Pay Life Policy
There are many advantages to choosing a limited pay life policy, the most important of which is that it provides people flexibility. Since people can choose the duration to pay the policy in full, the coverage continues throughout their lifetime. The policy continues to accumulate cash and grows without any further intervention by you. There are two more significant advantages of buying a limited pay life policy.
Futureproofing
A limited pay life policy is preferred by older individuals close to retirement. Since it may not be feasible for them to pay life insurance premiums after their retirement, they choose this policy to pay the amount early on when they can afford it.
Growth in Cash Value
This policy offers faster cash value growth as the insured person pays for the policy upfront. Your interest accumulates over the time of your policy and also fetches you higher dividends than any standard insurance policy.
Tax-free Death Benefit
In the event of your death, your beneficiary receives a lump-sum amount from the policy, which is not taxable.
In addition to these benefits, the limited pay life policy also allows the beneficiaries to withdraw some cash value or take a loan against it.
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Who can benefit the most from a limited-pay life insurance policy?
Limited pay life insurance is best suited for people who want to cover the cost of their retirement. The policy offers additional income as the policy’s cash value and dividend payment. The limited-pay life policies last you for a lifetime, have limited payments, and are also suited for children.
Even though this type of policy may sound easy to understand, it is still essential to consult a professional before buying such a policy. Ensure that the policy meets your needs and does not require you to overpay.
