Many people with whole life insurance are offered the option for fully paid-up life insurance, but what is paid-up life insurance? In this article, we discuss what it is, how it works, and why people use it. We also discuss its different types and common misconceptions surrounding them.
By the end of this article, you will better understand paid-up life insurance and whether it suits you and your investment objectives.
Understanding Paid-Up Life Insurance
Paid-up life insurance is a common term used when discussing life insurance-and more specifically, whole life insurance. However, this term can be confusing because paid-up does not refer to a type of life insurance. Instead, it is a state or condition of an existing life insurance policy.
A paid-up life insurance policy is one that requires no future premiums for the policy to stay in force or active. This means that a fully paid-up policy can continue to provide insurance coverage and cash value growth to the policy’s owner without requiring any future payments.
But, because a fully paid-up policy requires no additional premium payments, this type of policy “status” is only available on whole life insurance policies. Other types of insurance policies, like term life and universal life insurance, can’t be paid up.
Now that you understand what a paid-up life insurance policy is, let’s look at the different ways a whole life insurance policy can become fully paid-up and the different scenarios where this would make sense.
How Does a Policy Become Paid Up?
There are different ways to pay up a life insurance policy. Some whole life policies are created for a limited time before they become paid up, while others convert into fully paid-up insurance at a designated time in the future. Here are some of the most common ways a policy becomes paid up:
Standard Paid-Up Life Insurance Policy
The most common way for a policy to become a paid-up policy is for the policy owner to reach a certain age. A common milestone is reaching age 65, but it can vary depending on the policy.
Basically, if you pay your premiums up to this age, the policy becomes paid up and no further premiums will be necessary in the future.
Limited Pay Policies
Limited pay policies are designed for the owner to pay the full policy over a specific number of years. The policy owner can plan in advance to have paid-up life insurance in exchange for a set number of years of premium payments. Some common examples of limited pay policies are 7-pay, 10-pay, and 20-pay. You pay premiums on these policies for 7 years, 10 years, and 20 years, respectively.
While these options involve making ongoing payments until you have paid off the premiums, the other two types of paid-up insurance are structured differently. Let’s take a look at them and how they differ.
Reduced Paid-Up
Reduced paid-up insurance is a non-forfeiture option in the policy that allows you to use the cash value to buy out the policy at a reduced cost. You purchase a policy with a lower death benefit, but it’s paid in full so you don’t have to make any further premium payments. Your reduced death benefit is based on the amount you’ve already paid toward the policy, your age, and the accrued cash value.
Paid Up Additions
A paid-up addition is different from a paid-up policy but share some similarities. When you purchase paid-up additions, you use the policy’s dividends, growing at life insurance policy dividend rates, to purchase additional life insurance coverage and accumulate additional cash value. You are basically purchasing a small paid-up life insurance policy with each dividend payment. You can think of paid-up additional insurance as mini pockets of fully paid-up life insurance. Each little pocket of extra insurance may not mean much, but when you add them together, they can add up to a significant amount of extra insurance.
Paid-up additional insurance can add to the death benefit amount, cash value, and earn dividends. You can take a loan against the additions or surrender the cash value if you want to.
Is Paid-Up Life Insurance Right for You?
Now that you know what it is, you might be wondering whether it is right for you. Every person is different – what’s right for one may not be right for another. To determine if its is a good option for you, consider the following:
Benefits of Paid-Up Life Insurance
Benefits including:
Eliminates Premiums
What is paid-up life insurance’s primary benefit? You no longer have to make premium payments. If you lose your job or suffer a health crisis that makes it impossible to pay them, you can still keep the policy in force. This gives you great peace of mind, knowing that your death benefit and cash value are intact.
Stays In Force
Another great benefit of paid-up insurance is that it stays in force. You pay your premiums on the policy, guaranteeing a death benefit. If you run into trouble later on – like not being able to make premium payments because of a job loss or medical crisis – this won’t affect your policy because you’ve already made all the required premium payments.
Provides Cash Value Access and Growth
A major advantage is that your policy has a cash value. You can still borrow from your policy’s cash value so you have access to capital that you can put into other investments. Your cash value continues to accumulate dividends and grow. With some policies, you may receive living benefits, also.
Is a Predictable Investment
Whole life insurance is one of the most predictable investments out there, and paid-up life insurance retains this characteristic. You can enjoy slow and steady growth.
You don’t have to make any additional premium payments to maintain your policy after it has reached paid-up status. This feature allows you to control future costs. You aren’t subject to increasing premiums and have already paid the costs of maintaining this policy, so you can freely invest in other investments without any ongoing costs of this one.
Allows You to Tap into Tax-Free Investing
Paid-up life insurance is a form of tax-free investing. You only pay taxes when you cash out the policy, so you enjoy some of the deferred tax benefits of life insurance.
Drawbacks to paid-up insurance should be considered before deciding if it’s a good fit. Let’s dive into them.
Drawbacks of Paid-Up Life Insurance Coverage
Here are the major drawbacks:
You Can’t Add More Funds
What is paid-up life insurance’s major drawback? You won’t be able to add more funds to the policy. Your policy benefit will be set. You can’t increase the amount of your death benefits if you later decide that you need more insurance without having to obtain a new policy, which requires medical underwriting.
Paid-Up Insurance Limits Long-Term Cash Value Growth
This drawback ties into the last one. One of the best benefits of whole life insurance is that it has a cash value that grows over time. While a paid-up policy’s cash value will continue to grow, it won’t grow as much as it could if you were able to add more funds.
It Limits Long-Term Benefits
Your death benefit reduces with a paid-up policy. The amount of coverage you receive will be lower than it could be with a traditional policy that you continue to make premium payments on.
Depending on your situation, a paid-up policy option may be a good choice for you.
Bottom Line
Paid-up life insurance is an optional state for some whole life insurance policies. You give up the ability to invest more funds into your policy in exchange for the peace of mind of a guaranteed death benefit and not having to pay any further premiums. There are different kinds of paid-up life insurance policies, each with its own features, benefits, and drawbacks. It’s important to carefully review the policy’s terms to understand them and how to best leverage them.
About Us
When you contact Wise Money Tools, we’ll answer important questions like “What is paid-up life insurance?” and “Is it right for me?” We are experts in teaching individuals about how Infinite Banking works and choosing the best life insurance company for Infinite Banking. We specialize in tailoring investment strategies that minimize risk, offer tax-free growth, and provide predictable yields. Safe money strategies are available, and we can help you tap into them. We want to help guide you toward the best investment options, whether it’s paid-up life insurance or another investment vehicle.
Contact us to learn more and to set up a 15-minute strategy session.
