What is Modified Life Insurance?
Modified life insurance is a type of whole life insurance that comes with lower-than-average premiums in the early years of the policy, followed by higher premiums after a certain point.
How modified whole life insurance works
These whole policies function like other whole life insurance coverage, meaning they put protection in place that lasts your lifetime (assuming you continue paying your premiums) and include a cash value component.
With other whole life coverage, though, the premiums — the amount you have to pay monthly, quarterly, or annually to keep the policy in force — are fixed. The amount you pay stays the same throughout the life of your policy.
With a modified life insurance policy, however, the insurer adjusts your premiums down for the first several years of coverage, called an introductory period. This enables you to put coverage in place even when your budget might be tight.
Be advised, though, that the downward adjustment of your premiums is temporary. After a set time (usually three to five years), the premiums increase. And because you saw some savings on the frontend of your policy, you have to make up for them now. After the introductory period ends, a modified whole life policy’s premiums will cost more than a traditional whole life policy.
The introductory period also impacts your policy’s cash value component. While you’re in the years of paying the low premium, you won’t be contributing to the cash value.
Who might benefit from modified whole life insurance
The main allure of modified whole life insurance is that it allows you to put permanent coverage in place with a higher death benefit than you would otherwise be able to afford. But it’s important that you be prepared for the premium increase that will come after the introductory period.
These types of policies may be a good fit for people on a tight budget now who expect their income to increase significantly in a short period of time. If you’re in your final years of earning a degree and anticipate easily landing a high-paying job, for example, you might consider modified life insurance.
Still, though, you’re essentially locking in higher-than-average premiums for the majority of your policy with this type of coverage. You might be better served by exploring term coverage you can afford that comes with a convertibility option, allowing you to convert the policy into permanent coverage once your budget allows.