Paid-Up Life Insurance Policy

(And how does it work?) Author Icon Written by Trusted Choice Author Icon
Written by Trusted Choice

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What is paid-up life insurance? Can anybody have a paid-up life insurance policy? How do I know if my life insurance policy has a paid-up option? What are the benefits of paid-up life insurance?

These are just a few of the questions that probably pop into your head when you hear the term paid-up life insurance. And for good reason. Is there really a way to have life insurance coverage that is paid-up immediately?

Paid-up life insurance could be described as a life insurance policy that is paid in full, remains in force, and you don’t have to pay any more premiums. But it’s not really as simple as that.

Paid-up life insurance is only an option for certain whole life insurance policies.

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Whole life insurance policies offer life insurance coverage for the whole life of the insured person. Premiums are level and the death benefit (the amount your beneficiaries receive upon your death) is guaranteed as long as you continue to pay the premiums. 

In addition, whole life policies build up tax-deferred cash value, or savings, over the life of the policy. The cash value grows over time according to the premiums you pay in. If you surrender the policy, you are entitled to some of that cash value.

If you have a dividend-paying whole life insurance policy, or a participating whole life insurance policy, your life insurance company may pay dividends to you. Dividends are a portion of the life insurance company’s profits that is paid to policyholders who, by purchasing life insurance, are investing in the life insurance company’s growth.

Paid-up life insurance typically comes in two forms:

  • Paid-up status: You may be able to convert a whole life insurance policy to a paid-up policy in order to keep the policy in force without continuing to pay the premiums. This means your family will still receive a portion of the original death benefit if you die, but you do not have to continue to pay the premiums.
  • Paid-up additions: Using the dividends your policy earns to purchase additional coverage and grow additional cash value.

Converting to Paid-Up Status

Many people purchase whole life insurance policies with the best intentions. But over time the premiums may become difficult to pay, or the policy may simply not be a useful investment any longer. 

At the same time, letting the policy lapse may not be the best option either, especially after paying into it with the expectation of accruing a healthy cash value. Is there any way to keep the policy in force without continuing to pay premiums?

There is, if your policy allows conversion to paid-up status. But there’s also a catch. While you don’t have to continue paying premiums, you must technically still pay to keep the policy in force.

Paid-up life insurance is an option that allows you to keep a whole life insurance policy in force without paying any premiums for a while, or permanently. It is only an option if you have already built up a significant cash value in your policy.

With paid-up life insurance, the policy is kept in force by deducting the premium from your cash value account. At the same time, the death benefit also decreases. If you die your family will get the original death benefit, less the amount that was deducted from the cash value to pay the premiums. 

In addition to reducing the death benefit, if you want to surrender the policy or take a loan, the amount of funds available to you will be reduced.

Policies with paid-up status typically continue to earn dividends. You can use the dividends to pay the premiums or to purchase additional coverage (paid-up additions).

It is important to know if your policy has a paid-up option before you decide to stop paying premiums. Not every policy allows for paid-up conversion. In addition, you need to know how the paid-up conversion is triggered. Some policies convert to paid-up status if you simply stop paying the premiums. Others require some action from you.


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What Are Paid-Up Additions?

Paid-up additions are paid-up miniature life insurance policies. They build up cash value equal to the amount you pay in (if you pay in $5, you accrue $5 in cash value). They also offer a death benefit, and earn dividends and interest from your insurance company, which are added to the cash value. 

These mini-policies are truly paid up; there are no future premiums or other costs. Your family simply gets the death benefit if you die, and you accumulate additional cash value.

Typically, dividends on your original whole life insurance policy can be used to purchase paid-up additions. Then, as the mini-policies earn dividends, you can use those to purchase more paid-up additions, and so on, allowing your cash value account to quickly compound.

The ability to purchase paid-up additions is often included as a rider on the original policy. The purpose of purchasing paid-up additions is to accumulate cash value quickly.

Purchasing paid-up additions as an investment is advantageous to those looking for safe, liquid and tax-friendly growth.


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Is Paid-Up Life Insurance Right for You?

Life insurance is a complex topic with many options for people in various stages of life. Converting to paid-up status may be right for you if you want to keep your life insurance policy in force, but simply can no longer afford to make regular premium payments. 

You can be reassured that your beneficiaries will still receive some portion of the death benefit if the worst happens.

But remember, the death benefit will be reduced the longer you go without paying premiums. And if you need to take a loan from your policy or want to surrender it, the cash value will be reduced as well.

By working with an experienced and qualified financial advisor or life insurance agent, you can learn about your options and make an informed choice. Talk to a local agent today about your options.

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