4 Reasons to Consider Limited Pay Whole Life Insurance

Prospective insureds may want to consider limited pay policies in any circumstance where they desire whole life coverage and the policy owner has the financial resources to pay the higher premiums necessary for less than the full term of the coverage. Limited pay policies are generally not well suited to persons whose need for coverage is great and whose income is limited. In particular, limited pay policies are often preferred in the following situations:

  1. To acquire insurance protection for juveniles – Parents often wish to acquire a minimum amount of insurance protection for their children and to pay for the coverage before the children leave the nest, typically at age twenty-one. In the unfortunate event of a child’s death, the insurance may provide a fund for funeral and other expenses. In the more common case where the child survives to adulthood, the policy cash values can serve as part of a nest egg to start him or her on his or her way. In addition, if a child should become uninsurable, he or she will have some life insurance protection, even if he or she is not able to pay the premiums.
  1. To assure insurance protection after retirement without the need for additional premium payments – Many people wish to keep insurance protection in force after they retire to pay estate tax bills, provide estate liquidity, fund charitable bequests, and provide for dependents. A limited pay policy whose premium payment period terminates when an individual retires assures that person that the policy will remain in force even if the individual no longer has the income for ongoing premium payments.
  1. For many business life insurance applications – Perhaps the most common use of limited pay policies is in business insurance applications. Businesses typically want to know exactly what their financial commitment is to the insurance and want to fund obligations over fixed periods. Businesses frequently use limited pay policies for key employee insurance and for nonqualified deferred compensation funding. For example, businesses often use limited pay policies with payment periods equal to the time until executives are scheduled to retire with nonqualified deferred compensation arrangements. If an executive participating in the plan dies before retirement, the policy proceeds can be used to pay survivor benefits under the plan. If the executive survives to retirement, cash values can be used to pay part or all of the obligations to the executive under the plan. In the meantime, cash values have grown without any current tax, and life insurance proceeds can ultimately repay the company for earlier premium outlays.
  1. When the client’s working lifetime or high-income period is limited – For instance, a professional athlete such as a football player has a high income, but for a relatively short period of time. By compressing payments into a relatively short period that coincides with his or her expected high-income years, the policy terms are matched to the client’s circumstances more appropriately than if the premium payment period were extended beyond the professional’s career.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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