There are many different types of life insurance out there suited for many different budgets and lifestyles. Limited pay life insurance is often more flexible than typical insurance, especially if it is purchased early on in life. There are plenty of benefits associated with this type of policy, but it may not be for everyone.
The Limited Pay Difference
Limited pay life insurance is different in that the coverage lasts for a lifetime, but individuals are not required to pay for that coverage for their entire lives. There is a lot of flexibility in this type of policy, as well, since individuals can pay for it over the course of 10, 15 or 20 years. This way, once all of the predetermined premiums have been paid, the life insurance coverage continues but no more payments are required.
Four Parts to Limited Pay Life Insurance
There are four separate parts to a universal limited pay life insurance policy. These include the mortality cost, or the amount paid to cover the cost of the life insurance benefit, which is what the beneficiary receives upon the death of the insured. Next is the cost of administration, which is the charge for administering the policy and any taxes that must be paid. The savings are what is left after the mortality and administration charges have been deducted from the premium, and this amount is invested. The return on the savings is the interest rate that is paid on the cash value of the policy each year.
Guaranteed Cash Value
Because limited pay life insurance is a whole life policy, it has a cash value associated with it that accumulates based upon a guaranteed interest rate. Thus, if the insured needs to borrow cash at any point in his or her life, he or she can borrow up to 80% of the cash value of that policy. In some cases, an automatic premium loan provision can come into play. This means that if the insured is unable to pay his or her premium, a portion of the cash value of the policy will be used to keep the policy active.
Payment Options for Beneficiaries
Upon the death of the insured, the beneficiary of the mortality payment can receive this money in any number of ways. Most commonly, the insured chooses to have a lump-sum payment sent to the living beneficiary, and this payment is tax-free. However, other options do exist, such as the option to have monthly or annual payments sent from the account to the beneficiary. In this case, the remaining funds in the account continue to draw interest even as the beneficiary receives his or her payments. Proceeds may also be paid as a predetermined life income, but this income stops upon the death of the beneficiary regardless of the amount of cash value in the policy.
Cost Comparison with Other Policy Types
While life policies are more expensive than limited life policies in general, and they can vary by as much as 50%, they are the perfect choice for those who want to invest in their futures. Since the payments for the value of the policy will be made over a period of 10, 15 or 20 years rather than over the course of a lifetime, consumers should be prepared to pay higher premiums. However, for many, the higher premium payments are offset by the fact that the insurance continues even after all of the premium payments have been made.
Varied Death Benefits
Just like other types of life insurance, there are different death benefit amounts that can be customized depending upon the insured’s budget and lifestyle. Thus, the higher the death benefit selected by the insured, the higher his or her premiums will be. A licensed insurance agent can help individuals determine the right policy to fit any budget and lifestyle. Traditionally, individuals are urged to purchase coverage equal to their income for at least three to five years if they have dependent spouses or children.
Is It Right for Everyone?
No one type of insurance policy is the right fit, and that’s why there are so many different types of life insurance from which consumers can choose. Typically, limited pay life insurance is the best choice for individuals who are financially stable and who can afford to pay the higher premiums for a shorter amount of time. This is a great choice because it allows individuals to better plan for their families and their own retirement. For instance, a young couple who starts a limited pay life insurance policy and pays it off within 15 years will not have to worry about life insurance premiums when the time comes to pay for college. It is all about peace of mind, budgeting, and financial planning.
Anyone who has questions regarding limited pay life insurance, including the costs, the benefits, and the cash value, is urged to contact his or her insurance agent for more information. For many, this type of life insurance is a very important investment in their families’ futures.