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Limited Pay Whole Life Insurance: Choosing a Policy

Limited pay whole life insurance is a type of permanent life insurance policy that is designed to pay all premiums on a predetermined schedule rather than annual payments for life. Like any major purchase, the decision to make smaller payments over a longer period vs. making larger payments to pay off the policy faster depends on your financial goals. Here’s what you need to know before choosing a policy.

Read more: What Is Limited Pay Whole Life Insurance?

IS LIMITED PAY WHOLE LIFE INSURANCE RIGHT FOR ME?

Limited pay whole life insurance primarily appeals to two types of buyers: Individuals who have steady income now but don’t want to budget for insurance payments in retirement, and individuals who want to optimize their insurance policy for cash flow and tax advantages. These two goals aren’t mutually exclusive, and plenty of people choose limited pay whole life insurance to grow and protect wealth with the added peace of mind that they won’t have to keep funding their policies in retirement. 

The number one factor to consider when deciding if limited pay whole life insurance is right for you is how much you can afford to pay in premiums. Because you’re paying for your insurance over a shorter period of time, payments will be higher than if you were to spread them out over several decades. But if you’re sure of your current financial position and wary of your future financial security—like in retirement—it can make sense to choose a limited pay whole life policy. And if you have a large amount of wealth in a savings account or volatile market investment that you’d like to optimize with secure growth in a whole life insurance policy, opting for a limited pay option can help maximize and protect those dollars quickly. 

CHOOSING A LIMITED PAYMENT STRUCTURE

If you opt for a limited pay whole life insurance policy, there are several payment structures to choose from, depending on your insurance company and state insurance regulations. One option is to design your policy to be paid-up by the time you retire. Whether that’s 65, early retirement, or later, the cost of your policy will be divided over the number of years between now and retirement. Then, when you’re no longer working, you don’t have to worry about making premium payments and can use the cash value of your insurance policy for tax-free retirement income.

If your goal is to maximize dollars with tax advantages and guaranteed growth not tied to the stock market, you might opt for a different limited payment structure. The 7-pay structure is ideal for growing and protecting wealth, as it meets the IRS requirements outlined for insurance policy tax advantages while supercharging the insurance policy to rapidly increase cash value and optimize growth and potential dividends over time. And if 7 payments is out of reach for you financially, most insurance companies offer incremental payment structures like 10- or 20-pay policies.

LIMITED PAY WHOLE LIFE INSURANCE EXAMPLES

Regardless of whether or not you choose a limited pay policy or a traditional whole life insurance policy, your premiums will depend on your health, age, and the amount of insurance you buy. The following examples show what a single pay, limited 7-pay, and traditional whole life policy might look like for a 45-year old male applying for $1,000,000 in coverage, factoring annual growth of cash value based on a guaranteed rate of return and historical non-guaranteed dividends:

SINGLE PREMIUM*

YearAgeAnnual PremiumCash ValueDeath Benefit
146$332,150$306,330$1,002,170
247
$319,516$1,009,967
348
$333,210$1,019,076
449
$357,481$1,028,223
550
$362,328$1,037,432
651
$377,782$1,046,732
752
$393,844$1,056,224
853
$410,516$1,064,939
954
$427,825$1,075,929
1055
$445,752$1,086,256
2065
$664,493$1,211,915
3075
$963,524$1,385,799
4085
$1,344,513$1,628,501
5095
$1,734,008$1,919,198

*Single premium insurance does not meet IRS requirements for tax advantages in an insurance policy.

7-PAY POLICY

YearAgeAnnual PremiumCash ValueDeath Benefit
146$46,340$35,813$1,009,414
247$46,340$77,654$1,010,550
348$46,340$127,040$1,011,779
449$46,340$180,202$1,013,613
550$46,340$237,034$1,015,208
651$46,340$297,533$1,096,487
752$46,340$362,159$1,228,659
853
$384,553$1,241,907
954
$408,305$1,256,697
1055
$433,459$1,273,122
2065
$775,189$1,541,253
3075
$1,351,600$2,017,514
4085
$2,255,535$2,771,252
5095
$3,508,482$3,889,495

TRADITIONAL WHOLE LIFE

YearAgeAnnual PremiumCash ValueDeath Benefit
146$17,320$0$1,000,000
247$17,320$2,140$1,000,000
348$17,320$18,360$1,000,000
449$17,320$36,720$1,001,570
550$17,320$54,580$1,002,080
651$17,320$72,990$1,002,610
752$17,320$92,850$1,004,070
853$17,320$112,330$1,004,690
954$17,320$132,330$1,005,350
1055$17,320$152,790$1,006,070
2065$17,320$356,280$1,014,930
3075$17,320$574,380$1,023,350
4085$17,320$773,830$1,033,090
5095$17,320$897,610$1,036,000

Maybe you don’t need a $1 million life insurance policy or can’t afford these premiums. Remember, your payments are based on a number of factors and can be adjusted. Here’s an example of an individual who has $25,000 in a savings account they would like to roll into a 7-pay whole life insurance policy and can afford to save an additional $12,000/year toward their insurance. The cash on hand is added to the premium in year one as a one-time paid-up additions contribution and is liquid right away:

YearAgeAnnual PremiumCash ValueDeath Benefit
146$37,000$28,597$793,152
247$12,000$37,380$793,382
348$12,000$50,387$793,629
449$12,000$64,541$794,304
550$12,000$79,628$794,730
651$12,000$95,680$795,188
752$12,000$112,987$795,919
853
$118,895$773,180
954
$125,158$751,769
1055
$131,771$531,592
2065
$217,914$580,389
3075
$369,154$584,398
4085
$604,166$758,505
5095
$923,018$1,033,259

If you’re not sure which limited pay whole life insurance structure is right for you, or would like to see a financial illustration outlining various premium payment options, Paradigm Life Wealth Strategists offer free consultations and work with the nation’s top-rated mutual insurance companies to find a policy and payment structure that fit your financial goals.

Click to ​​schedule your complimentary virtual consultation here.