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What Are Paid Up Additions Life Insurance Policy?
What are paid up additions in a life insurance policy? In short, they’re coverage increases that you buy to add onto an existing whole life insurance policy. The best part? It can often be done with zero money out of your pocket. How is that even possible? We’ll explain everything below.
What Are Paid Up Additions in a Life Insurance Policy?
Paid up additions are segments of extra coverage that you add to a whole life insurance policy. Insurers each have their own rules for how and when you can buy them. You can pay for them in several ways:
- Pay a lump sum of cash
- Use your policy’s accumulated cash value (interest your insurer pays on a portion of every payment you make)
- Use the dividends your policy earned
If you use the last two methods, you don’t have to pay anything out of pocket to increase your coverage. That means your monthly payment amount stays exactly the same, although you now have more coverage in place.
Rather than being added onto your original policy, every paid up addition acts like a miniature policy within a policy. Each addition earns its own cash value. Each addition has its own death benefit amount. And because it’s paid for in full, it earns cash value even faster than your main policy.
How is that possible?
Permanent life insurance policies earn cash value over time. That cash value comes from interest the insurer pays on a portion of every payment you make. The idea is that, by the time the policy matures, the cash value is equivalent to the death benefit that must be paid to the beneficiary(ies). It’s designed to break even, in other words. But with paid up additions, there’s no need to break even. The addition is fully funded from the get-go, so it earns cash value until the day it’s paid out to your beneficiary(ies).
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Wait…Whole Life Insurance Policies Pay Dividends?
Some of them do, yes! You’ve probably heard of stocks that pay dividends. These life insurance policies operate the same way. They’re often offered by mutual companies, which are owned by the policyholders. (You can tell which insurers these are because they usually have “mutual” in the name, like Mutual of Omaha, MassMutual, and Penn Mutual.)
These are always whole life policies – specifically, a type called “participating whole life.” The “participating” means that you, as the policy owner, participate in the company’s profits by receiving dividends. The amount of dividends you get depends on three things:
- How well the insurer’s investments do
- How large a death benefit your policy has
- How much cash value your policy has accrued
The more invested you are in the company (i.e., the more cash value and death benefit coverage you have), the higher your dividend will be. You can choose to use those dividends to buy paid up additions, giving you more coverage without paying a dime.
Rather talk to a real person about life insurance? We get it – it’s confusing! That’s why we’re here to help. Call us at (800) 521-7873 and we’ll answer all your questions so you can make an educated decision.
Benefits of Paid Up Additions
You shouldn’t just be asking “What are paid up additions life insurance policy?” You should also be asking how they can add to your long-term financial portfolio, too. There are several great reasons to consider a participating whole life policy so you can take advantage of paid up additions over time:
- Get more coverage with no cost to you. Paid up additions give you more coverage that can help cover the increasing financial obligations you might acquire as you get older: children, a mortgage, student loan debt, credit card debt, etc. It’s a convenient way to make sure your life insurance policy keeps pace with your life.
- No new application or underwriting. You get more coverage with no extra effort on your part – no need to reapply and no need to take another medical exam. This can be a convenient way to add extra coverage even if you’ve developed health problems in the meantime. The insurer will take your age into consideration, however – so be aware that you’ll pay for a paid up addition at age 50 than you would at age 30.
- Earn more dividends. If you have a participating whole life policy, your new paid-up additions are also eligible to earn dividends in the future.
- Grow more cash value. As we mentioned above, insurers pay interest on a portion of every payment you make for permanent life insurance. They take your total monthly payment amount and subtract the cost of the coverage plus any fees. What’s left over goes in your cash value account and earns interest at the rate specified when you bought your policy. Later, you can access that cash value through withdrawals, loans, or surrendering (giving up) your policy.
If you want a policy that offers paid up additions, give us a call at (800) 521-7873! We’ll get you quotes for whole life policies that qualify so you can start building your life insurance cash value.
Questions to Ask If You Want to Have Paid Up Additions Later
If you like the idea of using future cash value and dividends to buy paid up additions, here’s what you want to ask your agent before you buy:
- What currently available whole life policies have this option?
- Does the policy require you buy paid up additions on a particular schedule (i.e., yearly)? Or can you buy them anytime you have enough cash value or dividends?
- Does the policy require you to wait for cash value or dividends to build up enough value to buy a paid up addition or can you buy one with cash?
- Looking at the available policies, is there a price difference between their costs to purchase paid up additions by age?
- How much death benefit should I start out with?
So, to answer the question, “What are paid up additions life insurance policy?”, we can say they’re a great way to increase your coverage and earn more cash value without having to spend extra money. We can help you find the right policy at the right price, from one of the country’s top-rated insurers. Give us a call at (800) 521-7873 or email us at info@lifequote.com to get started!
