What Is A Limited Pay Life Policy?

Consumers believe life insurance costs nearly three times the actual price, which, according to the nonprofit research group LIFE Foundation, may lead to them not purchasing the coverage they need.  

In one survey, those asked, estimated the cost of a 20-year $250,000 level term policy on a healthy 30-year-old male, at being close to $400. In actuality, the cost would have only been $150. Unfortunately, healthy younger adults who would qualify for preferred prices, overestimate the cost of life insurance closer to seven times!

The truth is that life insurance premiums have decreased by about 50% over the past 10 to 15 years. This is an important detail to know, especially for those who recognize they are underinsured. Statistically, 29% of men and 33% of women realize they are underinsured, and minority groups recognize their need for more life insurance even more than non-minority groups. 41% of African Americans and 37% of Hispanics report they need more coverage.

With the concern of price being so overestimated, it is nice to know that some life insurance policies can recover the cost of the purchase in a relatively short period of time. Imagine purchasing anything and having the cost of what you paid returned to you, while you get to keep what you purchased. Enter limited pay life insurance policies.

Limited Pay Life Insurance

Return of premium term life insurance products require the premiums to be paid for a set period of time and then guarantee the premiums paid will be refunded, as long as a death claim hasn’t occurred prior to that set time, AND the term policy is not renewed. Though the premiums paid are recovered in this type of term insurance policy, it should not be misconstrued as a limited pay life policy.

Universal life policies can accumulate cash values based on interest earned on additional premiums paid into the policy. This accumulated cash value can exceed the cost of premiums paid overtime and the policyholder can access that money via a policy loan or withdrawal to pay future premiums. This could limit the out-of-pocket premium payments required by the policyholder but should not be mistaken for a limited pay life policy.

Dividend-paying whole life insurance is the only type of life insurance that provides guaranteed fixed premiums and equity for the policyholder. This is truly the only type of insurance that can be classified as a limited pay life insurance policy. A limited pay whole life policy is a type of whole life insurance that only requires premiums to be paid for a certain time, can guarantee the premiums will stop and not return nor will the policy lapse when the premiums are stopped in the appropriate manner. 

Limited payment life insurance policies can be designed to accept premiums over one year, ten years, or longer periods of time depending on the age, health, and insurability of the applicant. One type of limited pay life insurance is a reduced paid-up whole life insurance policy (aka RPU policy). This type of limited pay life insurance is ideal for those who are in their sixth decade of life and don’t want to pay premiums much past retirement. 

Another type of limited pay life insurance is a single-pay policy. Single-pay life insurance is primarily used in estate planning where the policyholder wants to leave a larger tax-free legacy to their beneficiaries than they would be able to if they don’t purchase the limited payment life insurance policy. 

Limited pay whole life insurance is a great tool for those who want to recover 100% and more of the money they spent to purchase life insurance, want to have guaranteed money for their retirement, and leave a legacy that is more than they could accomplish without the purchase of the limited pay life insurance.

At McFie Insurancewe understand what limited pay life insurance is all about. We know when, where, and how it should be used to benefit the policyholder. But perhaps even more important we know when, where, and how NOT to use limited pay whole life insurance. Any agent can sell a limited pay life insurance policy, but there can be tax ramifications, decreases in the death benefit, or even an unexpected continuation of premiums if the policy is not designed to avoid these things.

This is why we offer a complimentary strategy session for those who are interested in purchasing life insurance. We specialize in policy design, analysis, and review so you can rest assured that you have the best coverage at a fair price and know it will last as long as you need the coverage. Anything less is money wasted. Schedule a strategy session with our team today.

Though insurance rates have decreased across the board over the past decade, this doesn’t mean all insurance premiums have. McFie Insuranceis here to make sure you are purchasing the life insurance you need, at the price affordable and comfortable for you, and that you will have the option to turn your life insurance into a limited pay life insurance policy in the future if needed.