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.
How It Works
Modified premium whole life insurance requires a lower premium payment for a set number of years. For example, a policy may allow the customer to buy an insurance policy that has a low payment for five years and a higher payment for the remaining life of the insurance policy. As with other whole life insurance policies, modified premium policies typically offer a tax-deferred cash account as part of the policy.
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.
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. 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?
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.
- Idaho Department of Insurance: Whole Life
- Illinois Department of Insurance; Buying Life Insurance; January 2010
- American Council of Life Insurers. "ACLI 2019 Life Insurers Fact Book," Page 64. Accessed Sept. 24, 2020.
- AllState. "What Is Cash Value Life Insurance?" Accessed Sept. 25, 2020.
- AIG Direct. "Whole Life Insurance." Accessed Sept. 25, 2020.
- Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds." Accessed Sept. 24, 2020.
- Northwestern Mutual. "Pros and Cons of Whole Life Insurance." Accessed Sept. 25, 2020.
- U.S. Securities and Exchange Commission. "Variable Life Insurance." Accessed Sept. 25, 2020.
Jay Motes is a writer who sold his first article in 1998. Motes has written for numerous print and online publications including "The Dollar Stretcher" and "WV Sportsman." He holds a Bachelor of Arts with a double major in history and political science form Fairmont State College in Fairmont, W.V.