Breaking Down Paid-up Life Insurance and Paid-Up Additions

Is it just us or does paid-up life insurance sound like paid-off life insurance? Well, that’s not too far off the mark, especially when discussing paid-up life insurance features. In the insurance world, we use the term “paid-up” to talk about paid-up life insurance, paid-up additions rider, reduced paid-up insurance option, and a type of dividend option. We’ll talk about all four of these topics to clear up any confusion:

  1. Paid-Up Life Insurance Policy: Whole life insurance policies that can be organized to only need premiums for part of your life.  
  2. Reduce Paid-Up Option. Reduced paid-up life insurance gives you the option to stop paying premiums earlier than your policy planned. However, reduced paid-up life insurance typically reduces your death benefit.
  3. Paid-Up Additions Rider. Paid-up additions (PUAs) are micro-policies that augment your original policy. A paid-up additions rider adds the benefit of these micro-policies to your plan. At Life Benefits, we talk about this option often because we’ve found it to be the best way to build your cash value and death benefit.
  4. Paid-Up Additions Dividend Option. Besides adding a paid-up additions rider to the policy, you can also opt to purchase PUAs with your dividend. This dividend option, like the rider, is an effective way to increase your cash value and death benefit.

What Is Paid-Up Life Insurance?

In a nutshell, paid-up life insurance allows you to pay life insurance premiums for a period of time (through a whole life insurance policy), then stop paying for life insurance and still reap the benefits. Unfortunately, this common nutshell definition of paid-up life insurance can be confusing and a bit misleading. To best understand how it works, let’s take a look at the three avenues for paid-up life insurance.

Paid-Up Life Insurance Policy

The guarantees of most whole life insurance policies are based on an expected age of 100 or 121. This means that the policy will endow when you reach that expected age. Endowment is a fancy way to say that the death benefit and cash value of your policy are equal. If you are still living when the policy endows, then the policy simply stops growing. At this point, you’ll still have access to the cash value of the policy through a policy loan, withdrawal, or surrender, and your life will still be insured. The insurance company will continue insuring you after the policy endows until they receive a claim notification. Once a claim is made, the death benefit will be paid to your beneficiaries, and the insurance company will be finished fulfilling its contractual guarantees.

Premiums on whole life insurance policies are set by the insurance company based on the amount of insurance you are purchasing. The insurance company will also specify how long the premiums will need to be paid. It is not uncommon for the insurance company to illustrate a stoppage of premiums, around age 75 – 90, on a whole life policy. The insurance company stops the premium like this when the policy has received enough funding for the insurance company to fulfill its guarantees for the remaining life of the contract. When a policy reaches this stage, it is called a paid-up life insurance policy. No more premiums are required after this point, yet the cash value and the death benefit will continue growing according to the insurance company’s guarantees.

Reduced Paid-Up Life Insurance Option

Even though a paid-up date has been determined by the insurance company, you can elect an early paid-up date for your policy. This is called a reduced paid-up life insurance option, and it works on the same principle as the paid-up option. With a reduced paid-up life insurance option, you can stop paying premiums on your policy, and the insurance company will continue fulfilling its guarantees in regard to the cash value and death benefit growth. The only difference with the reduced paid-up life insurance option is that the insurance company will also reduce the amount of death benefit in your policy. This is understandable because you are choosing to stop paying premiums early. Since you’re not going to be meeting the guaranteed premiums, the insurance company must also adjust the guaranteed death benefit. 

Paid-Up Additions

Paid-up additions are one of our most recommended riders at Life Benefits. We’re always excited to explain what paid-up additions can do for your life insurance policy. We’ve seen in our lives and in our clients’ lives how leveraging paid-up additions can benefit your finances. To start off, there are two ways to take advantage of PUAs. For one, you can add a paid-up additions rider. This is a provision that alters or adds to your policy that is only available through a whole life insurance policy. Secondly, you can choose the PUA dividend option, meaning you pay for paid-up additions through your dividends. 

Paid-Up Additions Rider vs Paid-Up Additions Dividend Option

A PUA rider and the PUA dividend option are both purchasing paid-up additions. The difference is that a rider is paid through a designated portion of your premium and your dividend is paying for the PUA dividend option (fairly self-explanatory). 

The PUA dividend option is a wise way to use your dividend because of all of these benefits:

  1. Increased cash value
  2. Increased death benefit 
  3. No tax
  4. Value compounds 

The rider is valuable because you can control how much you pay toward the PUA in your premium, and it brings all the same benefits, but faster. We’ll go into more detail on all the benefits of paid-up additions (rider or dividend option) in the next section.

Benefits of Paid-Up Additions

Let’s look over the benefits of paid-up additions. These apply to PUAs through a rider or a dividend option.

  • Benefit 1: Paid-Up Additions Increase Your Policy’s Cash Value and Death Benefit
    Paid-up additions are based on your policy-purchasing age. Since the price of these additional benefits typically raises with age, this gives you a significant benefit over the years. Plus, your dividend often grows as time passes and more cash value builds. So, the money you’re using to purchase these additions grows, as does the ‘discount’ you receive on the additions.
  • Benefit 2: Paid-Up Additions Aren’t Taxed
    This is simple enough. Unlike other earning endeavors, you don’t need to give up any money from paid-up additions toward taxes. We have a whole article about how to keep your dividend option tax-free. 
  • Benefit 3: The Value of Paid-Up Additions Compounds
    Your dividend eligibility is based on your death benefit, and by purchasing PUAs, you’ve been increasing your death benefit. So you begin to become eligible for more dividends, which means you increase your cash value and death benefit even more. The process continues to build on itself.

We don’t want you to feel like paid-up additions are pure magic. At the start, policies with the PUA rider often have a lower death benefit than other policies without it. However, the paid-up additions make up for these lower values because it prepares your policy for so much growth.

How this looks: One of our clients opened a whole life insurance policy four years ago. Now he has a declared dividend of just below $20,450. If he had chosen to receive dividends in cash, instead of using them to buy paid-up additions, he would receive $20,450. But, since he opted for paid-up additions, he now has $61,900 of extra death benefit and an increased cash value of $20,900. 

What’s Best for You Personally

Hopefully, you feel more comfortable with the concepts of paid-up life insurance and paid-up additions. But, understanding these concepts doesn’t always help you decide the best financial path for you and your family. We’d love to sit down with you (physically or virtually) to discuss the right financial plan and life insurance policy for you.

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