There are certain financial “gurus” out there who bad mouth whole life, despite the many benefits that cash value life insurance offers.
The main problem is the opponents of whole life make sweeping generalizations about it, despite the fact that the best whole life insurance companies offer a myriad of policy options, tailored to your specific needs and goals.
The truth is, whole life can be an amazing wealth accumulation tool, particularly when used in conjunction with infinite banking.
In the following article we will discuss paid up additions and the paid up additions rider and how it fits into this often misunderstood, and all too often neglected, financial freedom vehicle called whole life.
What is “Paid Up Additions”?
Paid Up Additions (PUA) DEFINITION: paid up additional life insurance purchased with additional premiums or dividends, over and above required premiums, that will immediately contribute to your death benefit as well as the cash value of the policy, dollar for dollar, minus any applicable fee.
Paid Up Additions Rider (PUAR) DEFINITION: A rider that allows you the opportunity to add paid–up additional life insurance with no proof of insurability (i.e. no medical test or questions). In turn, paid up additions help build your cash value very quickly as the additional insurance earns the policy’s guaranteed rate, plus dividends.
Paid Up Additions Benefits
Before we look into this rider in more detail and discuss your options, we should point out the main benefit of using this rider. Above all else, it is perfect for those who are using their insurance as a tax favored cash accumulation vehicle.
Most people, when they think “life insurance”, think only about a death benefit. But whole life insurance is so much more than a death benefit. It is called WHOLE life after all. And when you add in paid up additions to your whole life insurance policy, what you get is a supercharged cash value policy that provides a plethora of benefits.
Adding Paid Up Additions
The #1 benefit is our estimation is that you get to contribute more cash into your policy and grow your cash value and death benefit. For every dollar into your policy it increases your death benefit by a factor of X, X being 3 or 5 or more times your dollar into the policy.
At the same time, the cash in the policy is also growing via a guaranteed return, plus dividends. Although not guaranteed, most of these participating whole life policies, backed by mutual insurance companies, have paid dividends for 150 years or more, even during the great depression and great recessions. So when the market was down 30% or 50%, the policies still earned dividends of 6% or greater, depending on the specific carrier.
Using Dividends to Purchase Paid Up Additions
One of the easiest ways to gain more paid up life insurance is by using your dividends to purchase more paid up additional insurance.
You will now earn more dividends as a result. The additional dividends purchase more paid up additions, which create more dividends, which buy more paid up additions, and on and on it goes.
As you might be able to see, over time your cash value and death benefit will grow substantially simply by using your policy dividends to purchase more coverage.
With the paid up additions rider, you will find that most insurance companies head off in different directions and vary their offerings. For example, some will boast a ‘flexible’ paid up additions rider which means that you will be free to contribute as much as you want each year, as long as you do not MEC the policy.
MEC stands for modified endowment contract, and it comes into play when you contribute too much money into a policy at a given time. The good news is that life insurance companies keep an eye on your policy and will alert you if your policy is in danger of becoming a MEC. At which point you can simply ask for a refund of the premium amount above the MEC limits.
You might also find certain PUA riders that aren’t quite as flexible and you could lose the PUA rider completely if you do not contribute a certain amount each and every year. Most people find the flexible option a little better because they remain in control of their policy and how much they pay. With this option, a bumper year can off-set a poor year without losing the rider and having to reapply to have it put back into action.
How to Add the Rider
If you are still in the process of reviewing potential policies and haven’t yet made a decision, you are still in a good position because you can choose a company that offers the most freedom with the PUA rider.
However, what if you already have an open life policy? In this case, you should contact your provider because some do allow the rider to be added at any point during your coverage. When you apply for this change, they will consider a number of factors including your age, health, length of policy, and more. If you are successful, it will be added and you can benefit from everything we have discussed so far.
Finally, if you are not happy with your current policy you might consider a 1035 like exchange. With a 1035 exchange, you trade in your old policy for a better policy, tailored to your specific needs and objectives.
Paid Up Additions Example
So what does this all mean in real terms? In the interest of making everything clear for you, we now have a real-life example that you could apply to your own policy.
For $280,000 of coverage, let’s say that a 40 year old male with a preferred plus health class buys a policy at a premium of $4,000. In the first year, he decides to pay $12,000 in total, so the extra $8,000 will go towards paid up additions.
In this example, the man immediately has a cash value of $8,800 after year one and an additional $30,000 death benefit. If he does the same next year, the cash value will rise once more as will the death benefit. After just one year, the cash value reached $8,800 and the death benefit went up to $310,000.
Assuming that you have chosen a flexible PUA rider, you can pay less or more than this depending on your earnings then your cash value and death benefit will adjust accordingly.
As long as you were to keep paying extra every single year, your cash value will rise faster than ever before and the death benefit will do the same.
10 Pay Whole Life Insurance
Rather than paying into your policy every year, another great option is to purchase 10 pay whole life or 20 pay whole life.
With 10 pay whole life policy you pay premiums and paid up additions for 10 years. After 10 years you no longer have to pay premiums, although you may still want to add paid up additions via periodic cash payments and policy dividends.
Besides 10 or 20 pay whole life insurance, there are other ways to structure your policy to maximize death benefit and cash value.
Term Life Insurance Rider
Adding a term rider to your policy, particularly when you are younger and need a larger death benefit, is a great way to allow you to have the death benefit you need and contribute to your policy for more paid up additions.
Guaranteed Insurability Rider
The guaranteed insurability rider should also be considered when creating a policy as it will give you the option to purchase more life insurance down the road with no proof of insurability. This is an awesome rider when designing life insurance for children.
Nowadays, there are many people choosing this rider in order to see better policy returns and it isn’t really a surprise. Since they are paid up in an instant, the money you contribute will start to earn dividends and guaranteed returns. As you put more money into the policy, the policy will continue to grow and grow.
With the flexible PUAR option, it really does allow you the freedom to be in control. If you have no excess money one year, you do not have to feel pressed to contribute more cash in the form of paid up additions. As soon as you have some extra money, it can go into the policy and you will see the rewards in the years to come.
And you policy’s cash value is liquid. You can take a policy loan when needed. You can then use the policy loan to pay for things like additional passive income assets, pay down debt, fund a new business, or any other money making ideas you have.
When you buy whole life insurance, you see numerous advantages because not only do you have the peace of mind that loved ones will receive a death benefit, you also have many living benefits.
The policy growth occurs in a tax advantaged environment, it offers liquidity and security, all of which you will struggle to find elsewhere.
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