Limited Pay Life Insurance versus Regular Whole Life

Although a large portion of the general public is more interested in the monthly premium for life insurance, there are many who consider the product and the company ahead of the cost.

Deciding on the type of insurance that will offer the best solution for your needs should be the primary consideration before anything else.

Are you buying just a death benefit? If so, buy term. Do you need permanent coverage for a lifetime? If so, buy whole life or universal life.

If you’ve settled on whole life because you want life insurance that provides a death benefit for a lifetime but will also accumulate wealth over time, we need to discuss the options for paying it sooner rather than later.

This is where limited pay life insurance comes in the picture.


What is Limited Pay Life Insurance?


When we think of limited pay life insurance, we normally think of whole life. The term “limited pay” has nothing to do with the length of coverage (all whole life policies provide coverage for a lifetime) but rather, everything to do with how soon you want your policy paid up.

Certainly, the majority of whole life policies are set up for premiums to be paid over the life of the insured, but there is a subset of policyholders that prefer to pay premiums for a defined period of time rather than a lifetime.

The most pay periods for limited pay life insurance are:

  • Single Pay
  • 10 Pay
  • 20 Pay
  • Paid to age 65

Although “single pay” is an obvious pay term, 10 pay and 20 pay do not necessarily represent the number of payments (unless you pay annually) but rather the number of years you are allowed to pay premiums until your policy is considered paid-up.

Paid to age 65 is also obvious but it’s important to understand that a 40-year-old will pay periodic premiums longer than a 50-year-old and therefore have lower premiums for the same amount of insurance coverage.

Moreover, there are companies that allow the insured to pick a pre-determined number of years to accommodate personal financial circumstances. For example, an applicant might prefer a 14-year pay schedule to reach a paid-up status or even an 8-year pay schedule to reach paid-up status.


Why pay an insurance policy off earlier than you have to?


Most applicants who purchase limited pay whole life insurance do so for the financial benefits. By this, we mean the policy was purchased for wealth accumulation first and the death benefit is secondary.

The financial benefits can be extraordinary when compared to the financial benefits of a typical whole life policy where you pay for the life of the policy.

Accelerated Cash Accumulation

Let’s assume that you’ve selected a 10-pay Whole Life Policy for the financial benefits. By paying more premiums and on a quicker basis, your cash accumulation will be greatly enhanced because the premiums your paying will be subject to the guaranteed interest much sooner than if you were paying for 20-years, till age 65, or over a lifetime.

Increased Dividend Payments

In many cases, a limited pay policy like single pay, 10-pay, 20-pay, and pay to age 65 will earn higher dividend payments in the earlier years of the policy when compared to a typical whole life policy that’s paid over a lifetime (life pay).

Moreover, the insurance carrier will offer all of the dividend options generally offered on a whole life policy to a policyholder who has elected a limited pay policy and the dividends will continue to be paid after the policy has been paid up (subject to the company’s dividend payout).

What about the cash value in Limited Pay Life Insurance?


The only difference is accessing the cash value in a limited pay policy is that there will be more of it to access earlier in the policy.

Policyholders can withdraw their cash or take a loan against their cash value account the same way they would with a regular pay whole life policy, and those loans are tax-exempt and do not have to be repaid as long as the policy remains in force.

Any outstanding loans when the insured dies will simply be deducted from the death benefit before payment is sent to the beneficiary.


Limited Pay Life Insurance versus Regular Whole Life


Here are comparison charts showing the difference in values of a 10-pay policy versus a regular whole life policy for a $1 million policy for a 35-year-old male:

10-Pay Whole Life

Year Cumulative Premium Guaranteed Cash Value Projected Dividends Projected Cash Value Net Death Benefit
1 $28,600 $10,800 $0 $10,800 $1,000,000
5 $143,000 $98,410 $19,010 $117,420 $1,067,688
10 $286,000 $263,940 $52,570 $316,510 $1,182,152
15 $0 $310,580 $75,871 $386,451 $1,238,118
20 $0 $365,800 $105,920 $471,720 $1,283,760
25 $0 $429,040 $144,427 $573,467 $1,330,975
30 $0 $498,810 $194,833 $693,643 $1,384,896
35 $0 $573,730 $259,921   $833,651 $1,447,341

Regular Whole Life

Year Cumulative Premium Guaranteed Cash Value Projected Dividends Projected Cash Value Net Death Benefit
1 $12,820 $0 $0 $0 $1,000,000
5 $64,100 $21,620 $7,353 $28,973 $1,025,945
10 $128,200 $73,820 $28,011 $101,831 $1,093,055
15 $192,300 $136,150 $65,765 $201,915 $1,195,698
20 $256,400 $210,140 $124,807 $334,947 $1,324,281
25 $320,500 $288,920 $202,024 $490,944 $1,456,100
30 $384,600 $375,820 $300,164 $675,984 $1,588,519
35 $448,700 $469,150 $423,520 $892,670 $1,726,212

The Bottom Line for Limited Pay Life Insurance

So then, after comparing the 10-Pay Whole Life Insurance policy with the Regular Whole Life Policy, we come to some interesting conclusions and then decide if limited pay life insurance, specifically 10-pay, accumulates more wealth than regular whole life insurance:

The comparable values at age 69 are as follows:

Policy Type Premiums Paid Guaranteed Cash Value Projected Cash Value Net Death Benefit
10-Pay $286,000 $573,730 $833,651 $1,447,341
Regular Pay $448,700 $469,150 $892,670 $1,726,212
Difference ($162,700) + $104,580 ($59,019) ($278,871)

So the question here is: are you willing to give up a small amount of dividends and death benefit over a 35-year investment to save $162,700?

Let's Talk about Your Wealth Strategies
For more information about Limited Pay Whole Life Insurance and to see if it makes sense for you, call us at (800) 595-1130 during normal business hours or contact us through our website.