When you get whole life insurance, your goal is to have a paid-up life insurance policy with cash value, right?
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That can seem like light years away or like you’ll never achieve it with the incredibly high premiums insurance companies charge. It can feel like you’re paying premiums that get you nowhere.
There’s good news, though. Paid-up additions on your life insurance policy may help you reach your goal faster than you think.
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What is a Life Insurance Rider?
Most people have heard of a life insurance rider before. It’s an additional policy on top of the base policy you already bought. Think of it as extra protection.
Since life insurance covers more than just your death, it’s essential to know the life insurance rider options, including the paid-up additions rider. Any rider increases the policy’s protection, and of course, costs more money to provide that coverage.
Let’s dive into life insurance paid-up additions to see how they work.
Understanding Life Insurance Paid-Up Additions
Paid-up life insurance additions are additional whole life insurance coverage. You can purchase whole life insurance paid-up additions once you have a whole life policy that earned dividends. Rather than paying more premiums in addition to your current premiums, you use your dividends to increase your policy’s death benefit and cash value.
In addition, to paid-up additions increasing the policy holder’s death and living benefits, the additions can also earn dividends, increasing your cash value. You can leave the cash value as-is or access it to use for living expenses just like you would whole life insurance.
How Does it Work
Paid-up additions are an additional amount of coverage once you have a permanent life policy. The good news is there isn’t any medical underwriting necessary. If you already have a policy, you can buy paid-up additions when you have the funds.
There’s something else to consider, though.
Because you’re buying the additional coverage after you bought the original policy, it will cost more. Even though there’s no medical underwriting, you’ll be older, and the older you get, the more life insurance premiums increase. Keep that in mind as you decide if whole life insurance with paid-up additions is right for you.
Most insurance companies require you to include the paid-up rider when you take out the insurance. If you wait, as we said above, you’ll be older and possibly in worse health which could affect the premiums.
Most riders allow you to contribute as much as you want each year, but some have a specific amount or prefer that you make consistent contributions each year. You have two options:
- Level Paid-Up Additions Rider – You must commit a minimum amount to contribute each year. You can’t adjust up or down except in extreme circumstances.
- Flexible Paid-Up Additions Rider – This gives you flexibility regarding how much you contribute each year (if anything). Each insurance company has different rules, so always find out all the details first.
Don’t forget to read the fine print, though. Every insurance company works differently. Not reading the fine print could put your investment at risk.
The last thing you’d want is to find out you lost your rider because you didn’t adhere to the minimum required contributions.
What is a Reduced Paid-Up Additions Life Insurance Policy?
Some people prefer a reduced paid-up additions life insurance policy. This is another form of a permanent life policy, but it has distinct differences you must understand.
If you’ve had your whole life policy for a while and no longer want to pay the premiums but have a decent cash value, you can opt for reduced paid-up life insurance. This uses up your cash value, so make sure you don’t need the cash value for living expenses.
If you turn your cash value into a paid-up life insurance policy, it reduces your death benefit to the exact amount of your cash value. You would no longer own any premiums.
But there’s a catch.
Your death benefit equals the cash value, not the value of the premiums you’ve already paid. Most insurance companies require you to make at least 3 years of premium payments before they’ll allow the reduced paid-up additions life insurance policy.
A Real-Life Example
Jack is 42-years old and just bought a whole life policy. His premiums are $3,000 per year for a $200,000 death benefit. Jack also buys a paid-up rider for the option to contribute more to his policy, and in the first year, he contributes an additional $4,000.
This increases his cash value by $4,000 immediately, unlike the annual premiums he pays that cover both the death benefit and the cash value. The PUA also adds $15,000 to his death benefit. Jack has the option to continually pay more PUAs since he took the flexible PUA option.
Pros and Cons of Paid-Up Additions
- You must pay the full amount of the additions, which means an instant boost in your cash value and earnings.
- All earnings from the paid-up additions are tax-deferred. You only pay taxes if you withdraw the earnings (beyond your contributions).
- You can use your future dividends to cover your premiums when you earn enough money. This eliminates the burden of monthly premiums.
- Paid-up additions are only good on permanent life policies. Term life insurance policies don’t have them because they don’t have a cash value.
- You’ll need extra cash to pay toward the premium or to wait until your life insurance accumulates enough dividends to cover the cost of the paid-up additions.
Are Paid-Up Life Insurance Additions a Good Idea?
Paid-up life insurance additions can help you increase your death benefit and guaranteed cash value. If you’re worried about the state of the market or want to diversify your investments (which is a great idea), paid-up life insurance additions can be a good idea.
Before you buy them, make sure it makes sense for your financial situation and that you aren’t committing yourself to a minimum contribution amount that you cannot afford.