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Limited Payment Life Insurance Policy Explained

Author : Jeffrey Ward

Submitted : 2010-03-10 17:46:30    Word Count : 463    Popularity:   311

Tags:   Limited, Payment, Life Insurance, Policy

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The limited payment life insurance policy carries the idea of the straight life policy a step further. In short, if it can be determined what the annual rates or premiums should be for the whole life policy and also if it can be determined what the lifetime premiums will average, why not divide the lifetime premiums by twenty or thirty and get paid-up insurance?
This really amounts to a limited number of installment payments of the premium on such a policy for ten, twenty, thirty years, or to age sixty-five. And, as the man on TV says: "Why not?"

This policy provides for permanent protection, but the premiums are paid only for a certain number of years though the protection afforded is for the whole life of the individual. The most popular forms are the twenty-pay life and the thirty-pay life policies. The premium calculation is basically the same as
that for the straight life policy, but, because the payments are made over a shorter period, the yearly or monthly premiums have to be greater. In practice the insured pays much less than the face value of the policy during the limited payment period. The reason is that the company is able to invest the funds at
compound interest from the time the initial payment is made until the time, on the average, when those insureds will die. For example, an individual at the age of twenty might be said to have a life expectancy of an additional 51.20 years. Thus, on the average the company will have the use of the money for a good many years before it has to pay it out. This also means that the cash value of the policy will continue to rise even after the period for payment of premiums has expired, until eventually, if the insured does not die first, the cash value will equal the face value.

The main reason for purchasing this type of policy is that some people want to pay for their insurance during the time when their earnings are the highest. This will be dealt with at length in the chapter following.

Another reason for buying a limited pay life policy is that it has a heavier saving feature built into it than does straight life. If a person wants to save systematically through life insurance, this type of policy provides a means of doing so. The reason the savings feature is greater is that the premiums are paid sooner than in whole life and hence more interest can be earned, and also that more premiums per year are paid.

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