Limited Pay Whole Life Insurance FAQs

There are questions surrounding limited pay whole life insurance. Life insurance is a big deal in any household. Without it, you’d have to worry about your loved ones. There are many options to choose from when it comes to buying life insurance. Our experts answer some questions revolving around this topic.

Question – What is the difference between a “paid-up” policy and a “matured” policy?

Answer – A policy that is “paid-up” requires no further premium payments to keep the policy’s full face amount of coverage in force for the remaining term of the contract (generally to age one hundred). This results when premium payments have been sufficiently large to build the reserve necessary to support the policy for the remaining term. However, the reserve, which is closely tied to the cash surrender value of the policy, will always be less than the face value of the policy until the end of the term of the contract. At the time when the reserve equals the face value of the contract, the policy has “matured.” In other words, the face value (death benefit) and the cash value of a matured policy are equal (or nearly so). In a paid-up policy, the cash value is less than the face value until the end of the term of the contract when it matures.

Question – Can a limited pay whole life policy with scheduled premium payments for more than seven years still fail the seven-pay test and be treated as a modified endowment contract (MEC)?

Answer – In general, insurance companies are careful to design limited pay policies so that they pass the seven-pay test under the MEC rules. If the policy initially fails the seven-pay test, the policy illustration or ledger statement should clearly say so. However, even if the policy initially satisfies the seven-pay test, it may later fail the test if dividends are applied as additional premiums. It is conceivable that a ten-pay policy, for example, may fail the seven-pay test if the insured continues to pay the full annual premiums and dividends are applied as additional premiums. 

Learn more about limited pay whole life policies here.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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