What Is a Limited Pay Life Policy?

Definition of a Limited Pay Life Policy

A limited-pay life policy is a special type of whole life insurance in which you make a limited number of premium payments over a specified number of years to your insurer in exchange for a lifetime of insurance coverage.

The defining element of this type of life insurance is “limited-pay.” Premium payments end after a number of years (usually in fixed periods of 7, 10, 15, or 20 years), but your coverage continues beyond your last premium payment until the end of your life.

This differs from term life insurance, in which your coverage ends when you stop making your premium payments at the end of the term you select (usually 10, 15, 20, or 30 years).

Example of a Limited Pay Life Policy

The defining characteristic of a limited-payment life policy is its abbreviated premium payment schedule. For example:

• A 10-Pay Life Policy requires premium payments over 10 years. If purchased at age 40, you’ll finish payments by age 50 while maintaining coverage for the rest of your life.
• In contrast, a 20-Pay Life Policy spreads premium payments over 20 years, making it more affordable annually but still offering the benefit of a finite payment period.

Once the payment period is complete, the policy remains active, and you’re no longer required to pay premiums. The cash value within the policy continues to grow, providing potential liquidity for loans or withdrawals if needed.

Key Features of Limited-Pay Life Insurance

1. Fixed Premium Period: Payments are only required for a set duration, commonly 7, 10, 15, or 20 years.
2. Lifelong Coverage: Coverage continues for the insured’s lifetime, even after the premium payment period ends.
3. Cash Value Growth: These policies accumulate cash value over time, which grows on a tax-deferred basis.
4. Flexible Payment Options: Policyholders can often choose monthly, quarterly, semi-annual, or annual payment schedules.
5. Tax Benefits: The cash value grows tax-deferred, and death benefits are generally tax-free for beneficiaries.

How Does a Limited Pay Life Policy Work?

The biggest decision you have to make with a limited-pay life policy, other than how much coverage you need, is the fixed period of time you want to select for paying your premiums. Typically, you can choose a period of 7, 10, 15, or 20 years to pay all your premiums.

For example, if you choose a 15-pay insurance policy at 30 years old, you will pay your premiums during the first 15 years of the policy. Even if you live to be 85, you will be finished paying your premiums by turning 45, with 40 more years to live. If you had chosen a traditional whole-life policy, you would have paid for over 55 years.

Each limited-payment life insurance policy premium payment will be higher than what you would pay for an ordinary whole-life policy because the lifetime premium payments are condensed into a shorter period.

As with traditional whole-life insurance, you may choose to pay your premiums for a limited-pay life policy monthly, quarterly, semi-annually, or annually.

Another important thing to note: If you have an existing traditional policy, it cannot be converted into a limited-pay life policy once it is in force. You must decide whether you want a limited-pay life policy when you purchase your coverage.

Types of Limited Pay Life Insurance Policies

What Does a Limited Pay Life Policy Cost?

Different life insurance companies will offer you their own separate quotes for coverage for a limited-pay life policy. The cost of a limited pay life policy depends on several factors:

• The number of years you select to pay your premiums — The shorter the pay period you select, the higher your premiums will be. For example, premiums for 7-pay life insurance will be more expensive than premiums for 20-pay life insurance (at the same coverage amount) because you have 13 fewer years to pay for the policy's total cost.
• The amount of coverage you need — The higher your coverage amount, the more expensive your policy will be. For example, a $200,000 limited pay policy will cost you more than one for $100,000.
• Your age, gender, and overall health when you purchase the policy — The younger and healthier you are when you take out the policy, the lower your cost will be. Insurers also price policies differently for men and women, given their projected life expectancies.

In 2024, the current life expectancy at birth for U.S. women was 80.2 years, while the current life expectancy at birth for U.S. men is 74.8 years, a disparity of 5.4 years.1 Given that women are expected to live longer than men, their coverage tends to be less because insurers can spread out the risk of insuring them over a longer period of time.

What Are the Benefits of a Limited Pay Life Policy?

The benefits of a limited pay life policy include:

• Guaranteed Level Premiums for a Fixed Period — The premiums you pay remain the same for the entire limited period of time that you choose for your limited pay life policy.
• Guaranteed Lifetime Insurance Coverage — Like other whole life insurance policies, your coverage is guaranteed to last for your entire life with a limited-pay life policy, as long as you continue to pay your premiums on time to keep the policy in force.
• Cash Value That Grows Tax-Deferred — Because you are paying higher premiums, your policy has more money in it, so your cash value can grow at a more rapid rate. Like other whole-life policies, your cash value in a limited pay life policy grows tax-deferred.
• Policy Dividends — Although not guaranteed, your limited pay life policy may pay policy dividends, which can provide you with an additional source of income.
• Living Benefits — A limited pay life insurance policy with living benefits may appeal to you. Depending on your policy, you may be able to use a portion of the death benefit for medical expenses while you are still alive if you have a qualifying medical condition or terminal or chronic illness, as defined in your insurance contract.
• No Premium Payments During Retirement — A key advantage of a limited pay life policy is that it allows you to pay all your premiums in the time frame you choose. So, if you don't want to be paying life insurance premiums during your retirement, a limited-pay life policy may be an attractive option to ensure you finish paying your premiums before you decide to retire.
• Income During Retirement — You can access the cash value of your limited pay life policy through policy loans or withdrawals during retirement to supplement your income.

Are There Any Tax Benefits With a Limited Pay Life Policy?

There are some important tax benefits with a limited pay-life policy. First, a limited-pay life policy accumulates cash value over time on a tax-deferred basis (just like a whole life insurance policy). You may borrow against this cash value through policy loans and withdrawals to help pay for a major purchase (like a new car) or various expenses in a life emergency, such as a job loss.

Keep in mind that unpaid loans may reduce the death benefit amount. Second, the death benefit your beneficiary receives from a limited-pay life policy is typically tax-free because the IRS generally does not charge income tax on life insurance death benefits.

   Gain lasting benefits from strategic life insurance choices. Get a Life Insurance Quote  

What Are the Potential Drawbacks of a Limited Pay Life Policy?

Limited pay life policies may not be ideal for everyone. Here are some potential drawbacks to consider:

• Higher Premiums — Because you are paying your premiums in less time with a limited-pay life policy, they will run higher than the premiums you would pay for a whole life policy over the course of your entire lifetime. These higher premiums could have a significant impact on your budget.
• Risk of Becoming a Modified Endowment Contract (MEC) — Limited pay life policies can run the risk of becoming a modified endowment contract or MEC because they involve overfunding life insurance, which involves the payment of extra money into a permanent life policy to boost their cash value. This overfunding can lead to adverse tax consequences if certain limits are exceeded as determined by the IRS.² Be sure to discuss any potential tax implications with a financial representative and your tax professional.
• Opportunity Cost — Opportunity cost is the potential profit you might earn from investing your money elsewhere rather than paying the higher premiums for a limited-pay life policy. Depending on your life situation and overall financial goals, you may want to consider investing your money in stocks, bonds, or mutual funds as an alternative. 

Is a Limited Pay Life Policy Right for Me?

A limited-pay life policy is a powerful financial tool for those seeking lifelong coverage without the burden of lifetime premium payments. It offers flexibility, tax advantages, and the potential for accelerated cash value growth. Before committing, evaluating your financial goals, budget, and long-term plans is important.

If you’re ready to explore your options, consult a financial advisor or insurance professional to find the right policy tailored to your needs. Help secure your family’s future today with a limited-pay life policy designed to offer lasting benefits and help provide peace of mind.

   Learn how a Limited-Pay Life Policy helps secure your future. Get a Life Insurance Quote  

Sources

1. Life Expectancy. https://www.cdc.gov/nchs/fastats/life-expectancy.htm.
2. Administrative, Procedural, and Miscellaneous. https://www.irs.gov/pub/irs-drop/rp-01-42.pdf