Are Paid Up Additions a Good Idea to Build Cash Value and Increase your Death Benefit?
If you own or are considering purchasing permanent life insurance coverage, also known as cash value life insurance, you will be interested in learning about ways to supercharge that policy to pump up its value faster, while also increasing the death benefit. It is done with something called Paid Up Additions on dividend-paying whole life insurance policies, where policyholders let the annual dividends grow and then use those funds to buy additional coverage.
What is “Paid Up Additions”?
Consider Paid Up Additions (PUA) as single premium payment life insurance, which boosts the overall cash value of your policy. You can also tack on a special Paid Up Additions Rider, an option that is not commonly discussed, which also allows you to purchase more by using a portion of your premium payments (your own money instead of dividend profits), to add more coverage.
What Are the Benefits of Adding “Paid Up Additions” Rider to Your Life Insurance Policy?
Used separately or in unison, these Paid Up Additions options can add significant growth to your policy that you can bank on. Think of the concept as a savings account to which you, the policyholder, can contribute either personal dollars or funds from the insurance company dividend growth to both accelerate the cash value of your insurance and to increase the policy’s death benefit to your heirs. Remember, as the policy gets bigger, your dividends could also conceivably go up (depending on your insurance company’s yearly financial performance), compounding the overall cash value over time.
Paid Up Additions 101
Simply put, Paid Up Additions essentially means you are paying for the death benefit of your whole life insurance policy in full. You eliminate premium payments, as well as the insurance costs that the carriers charge you. Those very dollars that you used to “pay-up” your insurance boost the policy’s cash value, and pump up your death benefit. It is a powerful and efficient feature built into whole life permanent insurance that could be a worthy investment.
Paid-Up Additions Are A Value-Boosting Tool
The first thing you should understand is that the paid-up additions feature is only available on whole life insurance policies issued as “participating” policies. A participating policy is an insurance contract that pays dividends (generated from the insurance company’s annual profits) to the policy owner. The better your insurance carrier performs financially, the more dividends you will earn. You will cash in on those profits (or not) every year over the life of the policy, or much sooner. In a nutshell, with the cash paid from the dividend, you purchase paid-up additions, which earn additional dividends, that can then be used to buy more paid-up additions, and so on. Your financial adviser might characterize it as re-invested dividends. It can turn your whole life policy into a cash cow, while the death benefit also multiplies by virtue of the extra cash infusion.
You can only use the Paid Up Additions tool with dividend-paying Whole Life, where you can divert those earnings to purchase it, realizing a dollar-for-dollar increase to your policy’s overall value. Of course, there are no guarantees you will see dividend growth each year but the more cash value your policy has, the more funds you will have to draw on for living expenses. That is the key— more to live on while you are still alive.
The other types of permanent life insurance— Universal Life (UL), Indexed Universal Life (IUL), and Variable Universal Life (VUL) insurance policies do not offer the Paid Up Addition option. Neither does term life insurance, though that is much cheaper to buy and provides coverage for the length of time when you need it the most, however it doesn’t provide an investment component.
Using Personal Dollars to Purchase Paid-Up Additions
Using dividends to buy Paid-Up Additions is not the only game in town and this is a less-known but important option you should understand. This PUA Rider is tacked on for an additional charge at the time you buy your life insurance policy. This option can further enrich your policy as you literally “deposit” more cash into the policy to help it grow faster. Because they are immediately paid up, these additions will supercharge the cash surrender value faster than a policy without a rider.
An Example Showing the Use of Paid-up Additions
A 40-year-old buys $300,000 of death benefit with an annual base premium of $5,000 dollars. This policy owner chooses to pay an extra $5,000 into a paid-up additions rider in year one. This will add an immediate cash value of $5,000, as well as an additional $25,000 to his death benefit. The total payout into the policy would be $10,000— divided up with $5,000 going to cash value, and multiplying to a total death benefit of $325,000. If he keeps this up, he would continually hike both value and benefit to his policy over time.
Flexibility Or Not?
You have choices when it comes to the type of Paid-Up Additions Riders you can opt for, and one provides more flexibility than the other.
• Level Paid-Up Additions Riders
• Flexible Paid-Up Additions Riders
Level Paid-Up Additions Riders restrict you to a specific amount of annual additions you must commit to purchase. This amount cannot vary, with some exceptions in which it can be adjusted downward. That rigidity could be an issue for some.
Conversely, Flexible Paid-Up Additions Riders give policy owners a range of rider funding to choose from (depending on the insurance carrier) and can be variable from year to year. Investment advisers might tell their clients to opt for the flexible type of rider because it allows you, not the insurance carrier, to control your budget up or down. You would be wise to ask detailed questions before buying a Paid-Up Additions Rider to be sure of what you are getting—the Level or the Flexible. All companies do not offer both.
Dividend-paying Paid-Up Additions and Riders can be a complex concept to fully understand so you should weigh the pros and cons carefully, or perhaps with the advice of your Financial Adviser, before deciding if this is a wise “investment” option for you. Understand that life insurance was never originally designed as an investment; it was purely a tax-free death benefit product for your heirs.
The commitment of paying policy premiums for life can become daunting or unaffordable for some policy owners. If you are forced to forfeit the policy because you can no longer sustain the payments, and the cash value has not grown to expectations, you could suffer a financial loss. On the other hand, whole life insurance policies provide lifetime coverage, and paying off a policy can be achieved in a decade or so with the right financial circumstances. It is possible for your policy’s cash value to grow large enough over time that you can simply use a chunk of that cash value, or future dividends, to fund your premium, maintaining your policy in force, while no longer paying a penny out of pocket. Knowledge is power when it comes to permanent life insurance. Not all policies are created equal and if you decide that a Paid-Up Additions Rider is a critical investment component for you, speak to one of our knowledgeable life insurance agents to help guide you.