Limited-pay options for lifetime coverage

By Kathleen Johnson

Limited-pay life insurance is an appealing proposition to many clients. With today’s flexible products, there are multiple ways to achieve a limited-pay solution.

Limited-pay life insurance, often called 10-pay or 20-pay, is a traditional whole life carrier product design less frequently offered today. Although the concept works well in certain client situations, many plans lacked flexibility in case of clients’ changing financial situations, so many carriers — and financial professionals — moved away from offering them.

Since clients tend to like the idea of limited pay for lifetime coverage, it’s worth looking at today’s flexible products that can mimic the 10-pay feature while offering the ability to adapt to changing needs. The 10-pay feature is attractive for those clients who can make larger payments for a limited period and would like to eliminate the need for payments later in life while keeping coverage for life.

Who wouldn’t find these benefits appealing: Guaranteed premium, guaranteed cash value, guaranteed death benefit and guaranteed number of premiums? But do you know what’s not guaranteed? People’s life circumstances and the market. Situations change, and product plans can change too, yet in many cases, the traditionally structured 10-pay plans don’t offer the flexibility today’s consumers are looking for.

Consider today’s alternative, which also offers guaranteed premium and guaranteed cash value. It differentiates itself by 1) guaranteeing and flexing the number of premium payments and 2) using reduced paid-up life insurance to assure a guaranteed minimum death benefit.

Selecting reduced paid-up insurance offers an alternative to surrendering whole life policies for their cash value. The insurance company reduces a policy’s death benefit, leaves the cash value accumulated in the policy accessible, and requires no more premium payments - ever. Used in combination with a whole life policy, this brings a flexibility factor many clients appreciate.

Limited-pay: Flexibility to pay less

The unexpected can happen. These policies can be flexible to accommodate unplanned circumstances such as health issues, earlier-than-expected retirement, economic downturns and more. Therefore, look for products that offer the ability to change the frequency, number or dollar value of payments while keeping the death benefit intact.

Limited-pay: Flexibility to pay more

Clients might benefit from market upsides or pay raises, or they may simply want to put more money into a policy. Well-performing life insurance policies can be a good option for clients with excess cash. Clients benefit from the advantages of participating whole life, including high cash value growth and dividends, which can be a vehicle for creating wealth and leaving a legacy.

Flexibility in design

Financial professionals can work with clients to create customizable solutions that best meet situational needs, from 10- to 20-pay or pay to age 65 and many other options.

Let’s look at a scenario:

Man, age 40, desires a $100,000 death benefit forever and limited payments.
Solution: whole life policy with paid-up additions rider.
- After the 10^th year, when RPU is elected, the death benefit would continue to be more than $100,000 on a guaranteed basis, with a break-even in Year 15, and $123,200 on a nonguaranteed basis, with a breakeven in Year 10.
- With a whole life policy on its own and an annual premium of $4,661, the death benefit is always more than $100,000, and the policy would hit break-even (getting back the premiums paid into the contract in accumulated cash value) between years 21 and 22.
Compared with another company’s traditional 10-pay whole life product, with a $6,521 annual premium, their traditional product could have $6,028 more in nonguaranteed death benefit at Year 10, and the client would have paid in $18,600 more over the same 10-year period, so the flexible whole life product coupled with a PUA rider and an RPU election is financially advantageous.

Where’s the fit?

Wondering where this solution would work well? A few typically “good fit” solutions include:

Grandparents looking for gifting solutions.
Higher earning 50- to 60-year-olds expecting their earnings to with decrease as they retire.
Clients who have concerns about losing their job or becoming disabled and want coverage.
Families looking to have coverage in place and value the limited payment period.

Clients who expect to continue working into their traditional retirement years could likely have extra cash to put into a policy. Since there is no one-size-fits-all solution for life insurance, a best-practice approach when working with clients is to focus on flexibility and the ability to adjust when life inevitably changes.

Kathleen Johnson, CLU, FLMI, ACS, is the regional vice president, northeast region at Mutual Trust Life Solutions, the U.S. life division for Pan-American Life Insurance Group. Contact her at [email protected].