What is Limited Payment Life Insurance?
Life insurance can be simply defined as a contract between the policy owner (insured) and the insurer, in which the insured agrees to pay regular premiums, while the insurer agrees to pay an agreed upon amount to the insured’s survivors upon the insured’s death.
Life insurance policies are considered legally binding contracts which protect the insured and outline certain limitations in the liability of the insurer.
Limited payment life insurance also offers an investment component.
History of Life Insurance
Life insurance was first documented in early Rome. At that time, “burial clubs” were implemented. Members paid into the burial fund, and then upon the member’s death, his funeral costs were covered, and often his family would receive financial support from the burial club. Standard life insurance, as we know it today, was conceived in England in the seventeenth century, originally to protect traders.
Underwriters met with their clients at Lloyd’s Coffee House to discuss policies, which later became the famed Lloyd’s of London.
Life Insurance Identification
Limited payment life insurance was developed due to consumer demand. Many life insurance policy holders expressed frustration with term life insurance policies, as they would essentially be paying for most of their adult life for a policy that would only pay a limited amount upon their death.
As a result of the market demands, the insurance industry introduced “whole life policies,” also known as limited payment policies. This means that a customer can purchase a life insurance policy with a limited number of higher payments, thus eliminating the life-long payments of the past.
For example, a twenty payment limited life insurance policy would literally be paid in full after twenty payments.
Benefits of Life Insurance
Limited payment life insurance policies offer many benefits. The most obvious is the death benefit which, like standard life insurance, pays for one’s funeral and may help to cover expenses for one’s survivors.
Plus, since most companies set up the policies to be paid off prior to a customer’s retirement age, it saves money during that time, ensuring that the policy remains in place for the duration of the customer’s life. Many limited life insurance policies also include an investment fund, which can accumulate cash value.
This can be cashed in or a loan may be taken by the customer during his lifetime should financial need arise. Limited payment life insurance premiums don’t rise with age like standard life insurance can. Instead, the customer knows up front exactly how much he can expect to pay and for how long.
Types of Life Insurance
The life insurance industry offers several types of limited payment life insurance policies. Most are based on the number of premiums paid. Policies can have as many as 30 payments and as few as one.
Depending on the client’s age and financial situation, along with the specific company’s policies, the insurance agent will recommend the appropriate policy. In all cases, even when the full premium has been paid, the cash value will not reach that of the full death benefit until the client reaches the age of 100 (or upon death.)
A limited payment life insurance policy retains the same death benefit throughout the coverage period.
Warning About Limited Payment Life Insurance
In addition to all of its benefits, limited pay life insurance also has some disadvantages. First, since they are limited to a specific number, payments are significantly higher than those incurred by term life insurance owners.
Some life insurance companies actually charge more overall for these policies as well, presumably because the risk factor is higher for the company.
Some may also find that the inflexibility of the payments can cause difficulty with their budgets.
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