The pros & cons of limited pay life insurance policies

Lifelong premiums keeping you from considering permanent life insurance? Good news: Limited pay life insurance may be an option.

With limited pay life insurance, you get a permanent death benefit for your loved ones, but you condense the timeline of your premium payments to a specific number of years. It means you know what you'll be paying and when the payments will end, which may help you in planning out your financial strategy with more certainty.

A limited pay life policy is a type of permanent life insurance where, instead of paying for the insurance indefinitely, you pay the premiums for a set time. The most common types of limited pay policies involve making payments for a decade or two—10-pay life insurance, 15-pay life insurance and 20-pay life insurance—but offerings vary by insurer.

Whole life insurance is often better than universal life insurance or variable universal life insurance for limited pay. That's because after you've paid all your premiums, you have a permanent death benefit that's fully paid up.

Like other types of permanent life insurance, limited pay policies may accumulate cash value. By paying the premiums over a shorter timeframe, your policy's cash value could increase faster than it would if your premiums were ongoing.

Jon is a 40-year-old who buys a 10-pay policy, so he pays an annual premium for each of the next 10 years. As long as Jon keeps up with his payments, his loved ones will receive a death benefit if he dies during the 10-pay period.

After 10 years, when Jon is 50, he will be done paying premiums. For the rest of his life, he will have a death benefit that can be paid to his beneficiaries whenever he passes away. Plus, Jon can access the policy's cash value at any point in his lifetime.

Like any type of life insurance policy, limited pay life insurance has advantages and disadvantages. Understanding these can help you evaluate whether or not this type of coverage is the best way to meet your goals.

• Fewer years of premium payments. With a limited pay policy, you may be able to completely pay for permanent coverage during years when your income is higher or your financial responsibilities are lower.

• Faster accumulation of cash value. Because you're paying for the contract in a shorter amount of time, your cash value will build up more quickly than if payments were spread across your lifetime. This can be a strategic move since the earlier you invest, the more time your money has the potential to grow. Plus, cash value typically grows tax-deferred.

• Permanent coverage. Even though your premiums end after a specific number of years, your coverage does not. In fact, your life insurance's payout may increase over time if your policy pays dividends and you use them to purchase paid-up additions.

• Higher premiums. Although your life insurance contract isn't more expensive as a limited pay policy, you're paying it over fewer years.

• Opportunity cost. The money you put toward your life insurance policy is money you can't put toward another purpose, like investing in the stock market or buying real estate.

• Risk of becoming a modified endowment contract (MEC). A limited pay life insurance policy must be carefully structured to avoid becoming a MEC. A MEC can be undesirable because any cash value in excess of the premiums you pay does not grow tax-deferred.

A limited pay policy may be right for you if you want permanent coverage that will be fully paid after 10 to 20 years and you can afford to pay higher premiums over a shorter period instead of stretching them out over your lifetime.

To get more personalized insights and a deeper analysis of whether limited pay life insurance is the best option to protect your loved ones, connect with a Thrivent financial advisor.