Home Business Insights & Advice What is limited pay whole life insurance and how does it work?

What is limited pay whole life insurance and how does it work?

by Sponsored Content
9th Jun 20 9:56 am

In some life insurance policies, the insurer needs to pay premium throughout his life until he dies. This is often expensive for many, as they may not be able to pay the premiums after retiring. Limited pay whole insurance policies work differently. In these policies, you can pay premiums for a specific period. For example, you buy a policy at the age of 30. Your retirement age is 60. You decide to pay the premium up to 55 years. That means the policy remains effective for 25 years. The insurance company will pay your cash value once the term ends.

Why is limited pay whole life insurance beneficial?

One of the most significant benefits of a limited pay whole life insurance policy is the death benefits remain intact until you die. You can withdraw the cash value amount after the policy ends. But it is wise not to use up the money unless there is an emergency. Moreover, you don’t need to pay premiums until you die. Of course, the amount adds to your coverage value, but you may find it challenging to pay the premiums once you retire.

How does the policy work?

Premiums on limited pay whole life insurance policies last only for a predetermined period. However, you can enjoy the coverage benefits for life.

  • You may need to pay premiums for 10, 20, 25, or 30 years, depending on the policy you purchase.
  • You can choose how to pay the premiums, such as annually, semi-annually, quarterly, or monthly.
  • This type of policy provides tax-deferred cash value. This means you don’t need to pay a single penny as tax while receiving the coverage amount. Also, you can take out the cash value once the policy ends.
  • Some of the policies also come with dividend-earning facilities. However, it is not a guarantee that you will receive dividends. You only receive dividends if the insurance company makes a handsome amount of profit every year and decides to pay dividends to its customers. That dividend amount also gets added to your cash value. And you don’t need to pay taxes on that amount also.
  • This type of policy, also known as a level term policy, allows you to pay premiums in cash, purchase paid-up additional insurance, and reduced future premiums.
  • Your beneficiaries will receive an entirely tax-free cash value if you die before the policy ends.

Eligibility criteria

Different insurance companies have different eligibility criteria for purchasing a limited whole life insurance policy. Consult with the insurance companies about terms of premium payment and minimum and maximum entry age before buying the insurance.

This type of insurance also allows you to insure your insurability. It means you can buy additional insurance amounts before the term ends. Many life insurance policies require you to undergo a medical exam. But if you purchase additional insurance amounts to insure your insurability, you may not need to undergo the medical exam like traditional policies.

Now that you know the difference between traditional life insurance and limited pay whole life insurance, make your decision wisely on which policy suits your lifestyle better.

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