Maryland Life and Health Insurance License Practice Exam

Which of the following is a good example of a limited pay life insurance policy?

1. Whole life policy with premiums paid for life

2. Term life policy with a 30-year term

3. Whole life policy with premiums paid up after 20 years

4. Universal life policy with flexible premiums

The correct answer is: Whole life policy with premiums paid up after 20 years

A limited pay life insurance policy is characterized by the ability to pay premiums for a shorter duration compared to the coverage period, ultimately allowing the policyholder to have a fully paid-up insurance policy by the end of the premium payment term. In this instance, a whole life policy that requires premiums to be paid only for 20 years before the policy becomes paid-up meets this definition. After the 20-year term, no further premiums are due, but the life insurance coverage continues for the lifetime of the insured. The other options do not exemplify limited pay policies. A whole life policy with premiums paid for life requires ongoing premium payments throughout the insured's lifetime, which does not align with the concept of limited payment. A term life policy with a 30-year term provides coverage only for a specific period but involves paying premiums for the duration of that term rather than creating a paid-up policy. Finally, a universal life policy with flexible premiums allows policyholders to adjust payments and does not guarantee a paid-up status in a limited timeframe, making it distinctly different from a limited pay life insurance structure.