Paid-Up Additional Insurance

An example of additional insurance that has been paid for

Paid-up additional insurance is additional whole life insurance coverage purchased with dividends rather than premiums from a policy. A whole life policy can include paid-up supplemental insurance as a rider. It allows policyholders to raise their death and living benefits by increasing the cash value of their policy.

Dividends are paid on paid-up additions, and the value continues to increase endlessly over time. Paid-up additions can also be surrendered for cash or a loan might be taken out against them.

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KEY TAKEAWAYS 

• Paid-up additional insurance is additional whole life insurance coverage purchased with dividends rather than premiums from a policy.
• Dividends are paid on paid-up additions, and the value continues to increase endlessly over time.
• Nonforfeiture options include surrendering paid-up additions for cash value or taking out a loan against them.

Understanding Paid-Up Additional Insurance 

The monetary value of paid-up additional insurance can grow over time and is tax deductible. Another advantage is that they can be used by policyholders to expand coverage without having to go through medical underwriting. This is not only handy, but also adds value for a policyholder whose health has deteriorated since the policy was issued and who has exhausted all other options for increasing insurance coverage.

Even if there is no medical underwriting, paid-up supplementary insurance may have a higher premium than the base policy because the cost is determined by the policyholder's age at the time the extra insurance is purchased. There are no premiums for paid-up additions on some policies, such as those issued by the Veterans Administration.

If you take two otherwise identical whole life insurance policies with the same annual premium, but one has a paid-up rider and the other doesn't, the one with the paid-up rider will have a higher guaranteed net cash value sooner than the one without.2 However, a policy that allows paid-up additions may have a lower cash value and a much lower death benefit at first. It will take many years, if not decades, for the two programs' death payouts to be comparable.

When you acquire a policy, you must include a paid-up supplementary insurance rider. Some businesses may allow you to add it later, but your health, age, and other considerations may make it more difficult. Insurance companies' policies on paid-up supplementary insurance can differ. Some people benefit from the paid-up additions rider because it lets them to contribute as much or as little as they choose from year to year. Other firms require that donations remain constant, or you risk losing the rider and having to reapply for it in the future.

Dividends are paid only by mutual insurance businesses that are owned by their members. Dividends are not guaranteed, although they are usually paid out once a year if the company is performing well financially. Some insurance businesses have paid annual dividends for such a long time that they are essentially guaranteed. If policyholders do not want to use their dividends to buy paid-up supplementary insurance, they can use them to cut the premium instead.

Reduced Paid-Up 

Insurance is a nonforfeiture alternative that allows the policy owner to receive a smaller amount of fully paid whole life insurance, minus commissions and charges. The face value of the new insurance will be determined by the insured's age. As a result, the death benefit is less than the one provided by the expired policy.

Premiums Can Be Paid With Cash Value 

A policyholder can choose to convert their whole life policy's cash value into paid-up insurance. The policy is not necessarily paid up in the technical sense of the term, but it is capable of making its own premium payments in this situation. A policyholder may have to continue premium payments in the future, depending on the type of policy and how well it has performed, or the premiums may be covered for the duration of the policy's term.

An example of additional insurance that has been paid for

Consider a 45-year-old man who buys a whole life policy with a $100,000 death benefit for a $2,000 annual base premium. He decides to contribute an extra $3,000 to a paid-up additions rider in the first year of the policy. The paid-up additions will provide him with an immediate cash value of $3,000 and will increase his death benefit by $15,000. If he continues to buy paid-up additions, his cash value and death benefit will continue to rise over time.