Limited pay (10-pay)

Limited pay sets the funding period of an indexed universal life (IUL) policy. A 10-pay policy is funded by ten annual premiums, a 5-pay policy by five. The other patterns are a single premium, premiums to a set age such as 65, and premiums for life. The term comes from whole of life cover, where a limited-premium policy has a fixed number of payments.

How it works

A limited-pay plan sizes the premiums so that, after the last payment, the cash value is large enough to carry the monthly charges for life on the illustrated basis.

• Whole of life and IUL. A limited-premium whole of life policy is paid up by contract once the last premium is paid. A limited-pay IUL depends on its cash value: if credits fall short of the illustrated basis, more premium may be needed later to keep it in force.
• Flexibility. Premiums stay flexible within the contract's limits, so a 10-pay plan can be paid faster, slower or topped up.

The funding period. The longer premiums are spread to fund a policy, the more the policy takes to recover, because it supports the same death benefit throughout. With smaller premiums the cash value stays lower for longer, so the net amount at risk, and the cost of insurance charged on it, stay higher in the early years. A shorter funding period puts more money into the cash value sooner, where it has longer to earn index credits.

Worked example

Illustrative figures, not a forecast, from the funding example in Capital for Life's IUL guide, for one policy design:

• Single premium: US$3,581,400.
• 10-pay: US$468,100 a year, US$4,681,000 in total.
• 15-pay: US$362,900 a year, US$5,443,500 in total.
• 20-pay: US$322,000 a year for 15 years, then US$261,300, US$6,136,500 in total.

Spreading the same cover over more years costs more in total premium. Against the single premium, the return on retained capital needed to break even is about 6.5% a year for 10-pay, 6.8% for 15-pay and 6.9% for 20-pay.

In an international IUL

Capital for Life's indicative planned premiums are on a 10-pay basis. On the indicative table used for UAE and Australian residents, 10-pay planned premiums for US$1m of cover are US$11,234 a year for a female non-smoker and US$12,468 for a male non-smoker aged 30 to 39, and US$38,508 a year for US$2m of cover for a male non-smoker aged 40 to 49. A 5-pay plan suits a client with capital available now; a 10-pay plan suits one funding from income or a business over time. Capital for Life can also arrange premium financing; multi-pay is the preferred route, and the two are set out side by side so they can be compared on cost and control.

Common questions

Is a 10-pay IUL paid up after ten years?

The plan is designed so the cash value carries the charges after year ten on the illustrated basis. If credits come in below that basis, a further premium may be needed, and the annual review shows this in good time. Each policy illustration shows the plan on Basis #1 and on Basis #2, Basis #1 less 1% a year.

What is the difference between limited pay and paying to age 100?

Limited pay funds the policy in a set number of years, so more money reaches the cash value early. Paying to a later age spreads the cost into smaller premiums, and the policy takes longer to recover, because it supports the same death benefit throughout.

Can a 10-pay IUL be paid over 5 years?

Often, as long as the premiums stay within the contract's premium ceiling. Paying faster puts money into the cash value sooner, and the illustration can be rerun on a 5-pay basis to compare.

Go deeper: funding an IUL policy and premium financing alongside multi-pay.