Definition of Modified Premium Whole Life Insurance

While whole life insurance may be a good investment for some people, the cost of whole life insurance is significantly more than the cost of term life insurance. Modified premium whole life insurance may make the cost of whole life insurance manageable. However, before purchasing modified premium whole life insurance, a consumer should understand how these policies work to determine whether this type of policy meets her needs. Modified premium whole life insurance is also known as modified whole life or graded life insurance.

Whole life insurance differs from term life by providing death benefits regardless of when the owner of the policy passes away, whereas term life will only pay a death benefit within a specific period of time -- often between ​one​ and ​30 years​ according to the Insurance Information Institute. As with other whole life insurance policies, modified premium policies typically offer a tax-deferred cash account as part of the policy.

Modified Premium Whole Life Insurance

Similar to regular whole life insurance, the modified whole life plan will have a set death benefit upon contract. Unlike purchasing traditional whole life insurance, the premiums on a modified whole life plan will change across the life of the policy. This modified premium provides the opportunity to pay less premiums at the beginning of the policy, usually from ​three​ to ​five years​ according to the International Risk Management Institute.

The specifics of each modified premium whole life insurance policy vary depending on the insurance company writing the policy. However, the most common variation among modified premium policies is the amount of time the payments are lower. For example, one policy may offer lower payments for ​five years​, while another policy will offer the lower payments for ​10​. In general, the longer the customer makes lower payments, the larger the amount of each payment.

After the predetermined period, the cost of premiums will increase to an amount that is higher than the premium of a traditional policy. The increased premiums can make the overall cost of a modified plan higher than a traditional whole life policy. Some providers also offer the option for modified term life insurance as an alternative to whole life.

Modified Premium Whole Life Plan Benefits

Modified premium policies may be advantageous for those who want to buy a whole life insurance policy, but cannot afford the full premium at the time of purchase. For young adults new to the workforce or married couples with young children, finances may be tight for a few years. However, as time goes on and their financial situation improves, these people may be able to afford the higher payments. Retire Guide indicates that modified whole life is commonly marketed to younger people.

One of the benefits of a modified premium whole life plan is less underwriting than a traditional policy, this might be advantageous for people who might not be approved for other types of insurance. Obviously, the lower upfront cost of premiums is another benefit. The lifetime coverage and death benefit are also primary benefits for a modified plan.

A person buying a modified premium whole life insurance should determine whether the policy is convertible. For example, if the person cannot afford the higher payment, will the company allow the buyer to change the policy into a whole life insurance policy with a lower death benefit or into a term life policy with a more affordable premium? Modified whole life insurance can also include various riders such as long-term care for a customized policy.

Modified Premium Whole Life Plan Downsides

The fact that the modified whole life policy may end up costing more over the long run than a traditional plan is one potential drawback. The difference in premiums over time might make the policy contract a bit more complex in structure. While the modified plan has less underwriting, there is often a ​two​ to ​three-year​ waiting period which might negate the benefit of reduced underwriting -- especially in the case of someone who may have a health condition.

Another major potential drawback is waiting for the cash value. Because of the lower initial premiums, the cash value will be lower until after the premiums go up in cost. Of course, in general, the cash value is a benefit of the modified plan.

Whole life insurance polices, including modified premium policies, generally have a cash account that builds over time. Depending on the specifics of the policy, the policyholder can use the cash value in many ways, including borrowing from the amount, withdrawing the money or using the cash to pay the premiums of the policy. However, with modified premium policies, the cash value will not build as quickly as with a traditional whole life policy as a result of the lower initial payments.