What is Limited Payment Life Insurance?
Limited payment life insurance, also called limited pay life insurance, offers permanent whole life coverage with premiums that only need to be paid for a limited time.
How limited payment life insurance works
Limited pay life insurance is a type of whole life insurance. That means that once you put the policy in place — and assuming you make your premium payments on time — the coverage lasts for your lifetime.
Whole life insurance also comes with a cash value component, or a savings account within the policy that grows at a steady rate set by your insurance provider. When you pay your premiums, a portion of that payment gets redirected into your cash value.
With traditional whole life policies, you’re required to continue making premiums as long as you live in order to keep the policy in force. But limited pay life insurance puts an end date on that requirement.
When you choose limited pay coverage, you select a payment term. That could be 10 or 20 years, or until you turn a certain age, like 65. For the years of your payment term, you’re required to make premium payments in order to maintain your whole life coverage.
After the limited pay term expires, though, your policy is considered paid-up. From that point forward, you no longer need to make any payments. The policy stays in effect until you pass away, at which point it pays the death benefit to your beneficiaries. That will be true whether you made your last premium payment one year ago or thirty.
Pros and cons of limited pay life coverage
Limited pay life coverage can be a helpful retirement planning tool. Because it allows you to set an end date on your premium payments, it alleviates the burden to budget for those payments when you’re retired. It allows you to lock in coverage by making payments when you feel you’re most likely to have a reliable income stream.
The main downside of this type of coverage is that because you only have a limited window to pay up the policy, limited payment life insurance premiums cost more than standard whole life premiums for the same amount of coverage. You need to make sure your budget can accommodate these larger premiums during your limited payment term.
There’s a silver lining there, though. Because you’ll be making bigger premium payments, your policy’s cash value will grow faster than it would with the smaller premiums of a traditional whole life policy.
