Limited Pay Life Insurance (All You Need to Know)

Last Updated July 12, 2024

Easy Navigation

Senior asian business woman reviewing limited pay life insurance policies at a desk.

   Did you know that there are numerous ways in which you can pay for your life insurance policy? Most life insurance agencies only sometimes advertise that they have different ways seniors can pay their premiums. It goes far beyond the payments made either monthly, semi-annually, or annually throughout the life of the policy. We will guide you through types of payment plans, including limited pay life insurance.

How much does life insurance cost?

     When looking for any kind of insurance, the number one determining factor for most people to buy is the price. Life insurance costs are affected by a number of factors determined by the company’s underwriters. When you inquire about a possible policy, an agent will ask you a series of medical questions to determine your eligibility. These questions often range from asking you about a previous diagnosis, whether or not you are a smoker, your weight, or if you have HIV/AIDS. The reason for all of these questions is to determine your risk factor and how much it would cost to insure you. 

     The average cost for a healthy person who is in their 40’s is anywhere between $25-$30 per month for a face value that is roughly $500,000. The type of life insurance policy can affect how much you pay as well. Typically, the younger and healthier you are, the less amount of money you are going to pay in monthly premiums.  

Whole life Insurance Costs

      The cost for whole life insurance is typically the most expensive policy a person can have. This is because whole life or permanent life insurance lasts your entire life, comes with a cash value that you can use for premium payments, and can act as a tax-deferred savings account. For most seniors, a whole life insurance policy may be too expensive and so they use options such as final expense insurance in order to have a small nest egg when they pass that family can use for their last expenses.

Term Life insurance Costs

     Term life insurance is different from whole life policies in that they expire after a set amount of time and rates can increase should you renew your policy. Term policies typically last for 10, 20, or 30 years and the premium price reflects that. While term life insurance policies are cheaper they still follow the underwriter’s determination of risk. The healthier you are, the less expensive your monthly premiums will be. 

What Is Limited Pay Life Insurance?

     Limited Pay Life Insurance is a type of whole life insurance in which you can actually prepay the entire cost of coverage for a set number of years. At the time of purchasing an insurance plan, your monthly premium length is determined. You can pay the total amount for the premium costs within 10, 20, or 30 years of life as if it were a term life policy. You can even set the limited pay life insurance policy to be completed by a certain age. Similar to other whole life policies, you can choose to pay monthly, or annually, but unlike them, you can also choose to pay the premiums in one lump sum payment. 

     A limited pay life insurance plan is a great option for people who are looking for complete life coverage with a term life insurance payment schedule. The way the payment on a limited pay life insurance policy works is that a portion of the money goes towards paying the death benefit and the other goes towards built-in savings called cash value.

Pros and Cons of Limited Pay Life Insurance

Pros of Limited Pay Life Insurance

Limited Pay Life Insurance Policies are Paid in Full

  Paying for whole life insurance in advance means that you are able to keep your life-long coverage without worrying about a monthly payment. Limited pay life insurance policies give you the peace of mind of knowing that you will never have a policy lapse due to a missed payment.

Cash Value Gains

  Because Limited Pay Life Insurance premiums are higher, they gain cash value faster. Whole life insurance policies have a guaranteed interest rate growth you elect not to put those earnings towards the premium, allowing for more money to grow.

Cons of Limited Pay Life Insurance

High Monthly Premium Cost

     With a Limited Pay Life Insurance policy, you are paying a lot upfront which means that your monthly premium amounts are going to be much larger. You pay more now to save yourself the trouble of worrying about premium payments years down the road. The high monthly payments make it unavailable for anyone living with a fixed income. You can mitigate this by choosing a longer payment period but that only can go so far.  

Modified Endowment Contract Risk    

     You may be wondering what a Modified Endowment Contract (MEC) even is. A MEC is an identifier given to life insurance policies by the IRS with a cash value that exceeds the legal tax limits. All life insurance policies have some risk of becoming a MEC but limited pay life insurance policies have an even greater risk. The IRS uses the “seven-pay test” to determine whether or not your policy should be converted. If your payments in the first seven years of the limited pay life insurance policy exceed what you’d need to pay in full, then your policy will be converted. 

Other Types of Limited Pay Life Insurance Plans

     Limited Pay Life Insurance is but one way someone can pay for their whole life insurance policy. You may decide a limited pay policy is too expensive or that you do not want to risk your policy losing its tax advantages. There are a number of different ways you can pay for a whole life insurance policy without having to make premium payments until the end of your life.

Single Pay Whole Life Insurance

     Similar to a limited pay policy, a single pay whole life insurance is paid in full with a single lump sum payment. A single pay whole life plan is categorized by the IRS as an MEC which means it has some deviations from a standard whole life or limited pay life insurance plan. Tax-wise there are several major differences such as your cash value being taxed when it is used. The policy loans are taxed as well as any retirement income. Your interest and dividends take on a tax-deferred status which means that it is tax-free until you take out or use the funds in any way. It will then be taxed after the fact. 

7-Pay Whole Life

     “Overfunded life insurance” policies are a type of limited pay life insurance that requires the policy to be paid off in a certain number of installments. As the name suggests, these policies are required to be paid in 7 annual installments. Like other limited pay life policies, a 7-Pay plan has a guaranteed death benefit and a cash value that grows over time.  It is structured so that the policy is paid up in 7 years and meets the minimum requirements set by the IRS to be considered whole life insurance. The policyholder still gets to receive the tax benefits of a standard whole life insurance policy.

Incremental Pay Whole Life Insurance

     Incremental pay plans are very similar to limited pay life insurance policies. They range between 10-30 years and are customizable based on your needs. Like most limited pay life insurance policies, the shorter the pay period, the more expensive your premium amounts will be. However, if you pay the policy off quickly then you will be able to grow your cash value and dividends exponentially.

Pay to Age Life Insurance

  Depending on your insurance company, you may be able to work out a payment plan where your premium payments stop at a certain age. An example of this would be to pay a whole life insurance plan that is paid in full by the time you are 70 years old. This type of limited pay life insurance plan is perfect for folks who do not want to worry about paying premiums well into retirement. Annual premiums will depend on your health, your age, and when you actually decide on purchasing this type of policy.

Is there Limited Pay Life Insurance for Children?

    The answer to this question is yes! Children can be insured at less than a month old so long as they have no health issues and they are much less expensive to insure. Life insurance for children allows you to make sure your children’s future is secure and can even pay off their life insurance policy before they become adults. While it may seem grim to place life insurance on a child, you want to think of it as an investment in their future. They will be able to have access to a whole life insurance policy accumulated cash value without having to pay the premium amount themselves.

Final Expense Benefits is Here For All of Your Insurance Needs

     Whether you find yourself in need of a limited pay life insurance policy, or a term policy, or just have questions about life insurance we are here for you. Our expert licensed agents are incredibly compassionate and are dedicated to providing you with the best service possible. At Final Expense Benefits, we treat all of our clients like family and will help you get the best possible rate with one of our top-rated insurance carriers. 

     If you are looking for trusted and affordable final expense insurance, the experts at Final Expense Benefits have got you covered. Call one of our talented agents today at 1 (866) 311-4338 to lock in the best premium rates.

Frequently Asked Questions

Limited pay life insurance policies are whole life policies. As long as you pay the premium amounts discussed within your contract, you are entitled to coverage for your whole life. Upon your death, your beneficiary will receive a death benefit totaling the agreed-upon face amount. 

If your life insurance policy turns into a MEC, it is treated like a nonqualified annuity. They act as investment products that are funded with after-tax dollars. 

In addition to the above-mentioned payment plans, you can choose to go with term life insurance, a final expense insurance plan, or change your lifestyle so that you can lower your monthly payments. 

At Final Expense Benefits, we offer plans with some of the nations leading life insurance companies. They all offer plans with no medical exam and our licensed agents can help find the best fit for you. 
Yes! Our carriers specialize in covering individuals who suffer from pre existing conditions and our licensed agents can connect you to a carrier at an affordable rate. We know that you are deserving of life insurance coverage no matter your health situation. Fill out the form to the right or call an expert with Final Expense Benefits to get started.

Prefer To Call Us?

We know insurance is tricky.
5 agents available now