What Is Limited Payment Life Insurance?

What Is Limited Payment Life Insurance?

Limited payment life insurance is a type of whole life insurance that you pay off over a set period—instead of making premium payments for the rest of your life. Like ordinary whole life insurance, it offers lifelong coverage and a savings component. But you pay premiums only for a set number of years. 

For example, State Farm offers limited payment life insurance policies with terms of 10, 15, or 20 years. The premiums are often higher than those on ordinary whole life policies but only continue for a fixed number of years. Once paid off, your coverage remains in place for life.

How Limited Payment Life Insurance Works

Limited payment life insurance provides all of the benefits of whole-life coverage, such as a guaranteed death benefit, a cash value savings component, and fixed premiums. However, instead of paying for the policy for the rest of your life, you pay it off over a fixed number of years.

With ordinary whole life insurance, insurers divide your policy’s cost into payments based on your current age and life expectancy. For example, if you’re 35 and they expect you to live to 82, the cost would be based on a life expectancy of 47 years. On the other hand, with limited payment life insurance, the policy’s cost is divided over a set term that often ranges from 10 to 20 years. 

While the premium amount is often higher on limited payment insurance policies due to the shorter term, the policies get paid off sooner and the cash value grows faster. Once the policy is paid in full, you’ll retain coverage for life and won’t need to make any additional premium payments.  

Alternative Payment Options

A limited payment life insurance policy is just one way to pay for whole life insurance. If the premiums are a bit too high, you can stick with an ordinary policy that splits up the policy’s cost over the rest of your life. If you’d rather pay the policy off as soon as possible, you can opt for a single upfront lump-sum payment.

Further, if you’d like both permanent coverage and payment flexibility over the years, adjustable (universal) life insurance may be a good fit.

Pros and Cons of Limited Payment Life Insurance

Pros Explained

• Limited payments: Payments are limited to a set term. So you can potentially have no payments in retirement, but maintain your coverage.
• Permanent coverage: Coverage lasts for life as long as the policy is paid.
• Cash value accrual: The cash value accrues faster than with an ordinary whole life policy. 

Cons Explained

• Higher premiums: The premiums are usually higher than those on an ordinary whole life policy. 
• Opportunity cost: By investing more into a life insurance policy over a shorter time, you can miss opportunities to earn greater returns by investing elsewhere.
  

Is Limited Payment Life Insurance Right for You?

Limited payment life insurance can be beneficial in a few scenarios, such as if you have more disposable income now than you expect to have in the future. For example, if you’re 40 and don’t want to pay life insurance premiums in retirement, a 20-year limited payment life policy could help you secure coverage and avoid the premiums later. 

Limited payment life insurance can also be helpful if you want to purchase life insurance coverage for a child. For example, if you open a 15-year policy when a child is born, it’ll be fully funded by the time they turn 15. Without ever needing to pay another premium, they’d gain access to the cash value component and a guaranteed death benefit that lasts for life.

Frequently Asked Questions

The Bottom Line

Limited payment life insurance enables you to get whole life coverage without making payments for the rest of your life. It can be a good fit if you can afford the higher premium payments over the next decade or two. However, it’s important to weigh the benefits against the returns you could get by investing your money elsewhere. A financial advisor can help you consider all of your options and decide which route will best help you reach your goals.