Limited Pay Life Insurance in Canada

If you want permanent life insurance, a whole life insurance policy could be a great option.

It comes with insurance coverage that doesn’t expire and a savings element that allows your money to grow on a tax-deferred basis. Traditional whole life plans, however, require you to pay premiums for as long as you live. 

Don’t want to make premium payments until you pass? Consider limited pay life insurance, instead. 

Limited pay life insurance is basically whole life insurance with a unique payment structure. You pay premiums for a limited number of years, but the policy benefits (the death benefit and cash value) last for as long as you live. 

We’ve put together this guide to go over everything you need to know about limited pay life insurance, including its costs, pros and cons.

Key Takeaways: 

• Limited pay life insurance has premium payments only for a limited period, though policy benefits continue for the rest of your life
• It is a good option for people who prefer a shortened payment window for lifetime coverage
• The most common options for the payment period are 10, 15, 20, or 30 years 

What is limited pay life insurance?

Limited pay life insurance is a type of whole life insurance policy that you pay for over a limited period rather than for the duration of your life. Depending on the terms, you pay premiums:

• For a certain number of years, like 10, 15, or 20 years
• Until you reach a certain age, like 65 or 70

Regardless of the length of the payment period, coverage lasts for as long as you live. These policies have a guaranteed death benefit, meaning your beneficiaries will receive a lump-sum tax-free payment upon your death. They also accumulate cash value at a fixed rate each year. 

In other words, apart from the unique payment structure, limited pay life insurance is no different from standard whole life insurance. 

Compared to standard whole life plans, limited pay life insurance has higher premiums. That is so because the payment period is shorter. 

The payment period is determined at the time of the purchase of the policy. Most insurers will ask you to pick from a list of options, like 10 or 20 years or until your 65^th or 70^th birthday. However, some providers may let you choose any time frame you want, like 18 or 23 years. 

The shorter the payment period, the higher your premium rates will be. You may opt to pay every month, three months, six months or 12 months. 

Types of Limited Pay Life Insurance Policies

Here are the different types of pay life insurance policies available in Canada. 

Single pay whole life insurance

You pay the entire premium amount in one go, at the time of purchasing the policy. The benefits, however, last for as long as you live. 

Since your policy is fully-funded, it builds up cash value far more quickly than a standard whole life insurance plans or other types of limited pay life insurance policies. But on the downside, single pay life insurance doesn’t provide the same tax benefits as other policies. For instance, if you take a loan against the cash value or withdraw it directly, that amount will be taxed as regular income.

Despite lacking some of the tax advantages associated with whole life insurance, a single-pay plan can be a good option for someone who has a large estate and wants to use life insurance primarily for estate planning. Because whole life insurance offers a guaranteed payout, it can help you pay for estate settlement costs and preserve the value of your estate. ‍

8-pay life insurance

An 8-pay life insurance provides lifetime coverage and offers the same tax benefits as standard whole life plans, but it is fully paid-up in just 8 years. 

10-, 15-, & 20-pay life insurance

These policies work the same way as 7-pay life insurance. The payment period you opt for reflects for how long the premiums have to be paid. 

The total cost of insurance, however, is pretty much the same for each of these plans. Of course, the shorter the payment period, the more expensive each premium payment will be. For example, each premium payment for a 10-pay life insurance policy will be costlier than for a 20- or 15- pay life insurance with the same coverage amount. This is because you are paying the same amount in life insurance premiums in 10 years instead of 20 or 15.  

Pay to age 65

With a pay to age 65 whole life insurance policy, you won’t be paying the premiums for a fixed number of years. Instead, you will continue making payments until age 65, regardless of your age at the time of purchase. After that, you will be done making payments, though the coverage will continue until you death. 

Advantages and Disadvantage of Limited Payment Life Insurance

Limited pay life insurance offers many benefits, but it is not without potential pitfalls. Being aware of its pros and cons can help you make an informed decision regarding whether it is the right for you or not. 

Pros

• Guaranteed level premiums: The premium rate remains the same for the duration of the payment period. 
• Guaranteed lifelong coverage: Your policy stays in force for as long as you live or until you cash it in. 
• Limited payment period: You get to enjoy all the benefits of a traditional whole life insurance plan with a limited premium payment period.
• Faster accumulation of cash value: Higher premiums means the cash value grows more rapidly.

Cons

• Higher costs: One of the biggest disadvantages of limited pay life insurance is more expensive premiums. The shorter the payment period, the costlier your premiums will be. 
• Higher chances of missing a payment: Because of the high cost, some policyholders may find it difficult to keep up with the payments. If you fail to pay premiums on time, you run the risk of losing the coverage (and all the benefits it provides). 

Who Is Limited Pay Life Insurance Perfect For?

Limited pay life insurance is a good fit for those who want to quickly build up cash value, pay premiums for a limited period rather than the rest of their lives, and can afford the higher premiums. 

You may want to consider it if: 

• You want to use cash value to supplement your retirement income
• You are looking to purchase coverage for someone else, like a child or grandchild
• You have well-defined financial goals (like start a family in the next 5 years, buy a house in 10 years) and want a policy that perfectly aligns with them
• You are interested in infinite banking — a concept that allows you to become your own bank

How much does a Limited Pay Life Policy cost?

How much you will pay for limited pay life insurance depends in part on the premium payment period. The shorter this period is, the costlier each premium payment will be. Apart from the payment schedule, several other factors, like age, sex, health, family medical history, lifestyle choices, and occupation, impact your insurance costs. 

1. Age: The older you are, the costlier life insurance becomes. 
2. Sex: Women pay lower premiums than men for the same policy, as they tend to live longer on average. 
3. Health: Underlying illnesses, like diabetes or arthritis, can push up your premiums.
4. Family medical history: A family history of certain conditions, like Alzheimer’s disease or multiple sclerosis, may increase your insurance costs.
5. Smoking: Life insurance rates for smokers are usually 200% to 300% higher than non-smoking rates. 
6. Occupation: Expect higher premiums if you are in a high-risk career, like firefighting or construction.
7. Coverage amount: The greater the death benefit, the higher the premium. 

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How long does coverage last for a limited pay insurance policy?

Only the payment period is limited, not the coverage. A limited pay insurance policy provides lifetime coverage, much like any other type of permanent life insurance policy. 

What are the payment options for a term life insurance policy?

Depending on the insurer, you may have the option to pay your term life insurance premiums monthly, quarterly, half-yearly, or yearly. In most cases, paying in full once a year will reduce your cost of insurance by 2% to 8%.

What are payment options for a whole life insurance policy?

You will likely have the option to pay monthly, quarterly, semi-annually, or annually. While most policyholders choose monthly payments, paying premium annually can save you a considerable sum. 

How to save money on limited pay life insurance?

Limited pay life insurance is a type of whole life insurance, which is one of the costliest life insurance products around. On average, it is 5 to 15 times more expensive than term life insurance. Thankfully, there are actions you can take to reduce your insurance cost. 

1.  Apply early: For every year you age, life insurance premiums go up by 5% to 12%. Therefore, sooner you apply for coverage, the better. 
2. Maintaining good health: Life insurance rates are based on a host of factors, like age, health, lifestyle choices, and family medical history. While there’s not much you can do about age or family history, healthier lifestyle choices, such as eating a balanced diet, exercising regularly, and saying no to tobacco, can help you secure coverage at an affordable rate. 
3. Look for discounts: Bundling insurance products is more than just convenient. It can also save you money. For example, buying life insurance and home insurance or car insurance from the same provider may save you anywhere between 5% and 25% on each policy. 
4. Shop around: Life insurance premiums vary wildly from one insurer to another. Shopping around and comparing quotes is the only way to ensure you are getting the best deal.

Conclusion 

Limited pay life insurance is whole life insurance with a limited payment period. Common payment periods are 10 or 20 years or until you turn 65. Once the premium period is over, your policy will continue to provide benefits for as long as you live.

Not sure which type of limited pay policy is right for you? Let Dundas Life help you. Get in touch with us and one of our brokers will guide you through all your options. We will also get you quotes from multiple top-rated insurers in Canada so that you can secure the lowest rates. 

Frequently Asked Questions (FAQs)

How does a Paid-Up Addition Rider work?

The paid-up addition rider (PUA) allows you to purchase small chunks of whole life insurance without medical underwriting and increasing the monthly premium payment and stack them onto your base policy. Some whole life insurance policies give policyholders an opportunity to earn annual dividends.

You can use this money to buy fully paid-up extra coverage on a regular basis. Each paid-up addition is a complete whole life insurance policy in itself, meaning it will have a death benefit, grow cash value at the same rate as the initial plan, and earn dividends. With a paid up addition rider, you can significantly increase the death benefit and supercharge the policy’s cash value over time. 

Can I customize the premium payment period in limited pay life insurance?

Yes, you can customize the payment schedule within the options provided by the insurer. Most common options are 10, 15, 20, 25, or 30 years or until you reach age 60, 65, or 70.

What is the difference between a whole life policy and a limited pay policy?

The main difference between these two products is of the payment schedule. Limited pay life insurance requires you to make premium payments for a limited period. This could be a specific number of years, like 10, 15, or 20 years, or until you reach a certain age, like 65. In contrast, a whole life policy requires premium payments for the rest of your life. 

Is the premium amount fixed throughout the limited payment period?

When you purchase a limited pay life insurance plan, you will be asked to pick a payment period. No matter the premium period you select, your premium monthly premium amount will remain the same throughout that period. 

Are limited pay life insurance policies more expensive than other types of life insurance?

Limited pay life insurance is costlier than term life insurance, but this is not surprising. Term life insurance only provides life insurance coverage, whereas limited pay life insurance is life insurance and investment product rolled into one. 

In the short term, limited pay life insurance is more expensive than whole life insurance since premium payments are condensed in a shorter period. However, in the long run, it may prove more cost-effective than whole life insurance, for which you need to make premium payments until you die. 

What happens if I outlive the limited pay period in a limited pay life insurance policy?

The death benefit and cash value of a limited pay period insurance plan is not tied to its payment schedule. The coverage stays in force for the rest of your life; only the payment period is limited. Therefore, if you outlive the payment period (which could be a fixed number of years or last until you reach a certain age), you’ll continue to enjoy the benefits and coverage the policy provides.

Are the death benefits in limited pay life insurance policies guaranteed?

Yes, the death benefit is guaranteed. This means your beneficiary will receive the same amount, regardless of whether you die just after buying the policy or decades later.