At TermLife2Go, we believe that educating people on the value of life insurance is essential. That is because we believe in life insurance as a valuable tool in providing peace and security to those you love, as well as to yourself.
In the following article we will address the concept of paid up life insurance. What is it, how is it accomplished, and why anyone would want it.
What is a Paid Up Life Insurance?
Paid up life insurance DEFINITION: a permanent life insurance policy that is paid in full and will remain in force until you die. As a form of permanent life insurance, there are no premiums required because they have already been paid.
However, it goes a little deeper than this because different companies seem to offer different products with varying features. As opposed to being an individual life insurance policy, paid up life insurance can actually be an additional rider to a whole life insurance policy that gets offered by numerous companies.
Paid Up Whole Life Insurance
Whole life insurance is a policy that will remain in place until death. At this point, the death benefit will be paid to the beneficiary. For the duration of the policy, the premiums and the death benefit should be level which means that they will never increase with time and age. As long as you make the required payments, the policy cannot be cancelled by the company themselves.
On the side, there is also a cash value life insurance component that builds over time depending on the level of premiums you are paying. If you were to give up your policy (something we will assess a little later), you would receive a portion of the cash value in return.
Finally, we should also note that some insurance companies will pay dividends depending on whether they are owned by the policyholders or not. If you choose a company that pays out dividends, you will earn a small percentage of the company’s profits each year in the form of an annual return of premium dividend. From here, you can keep it for yourself as cash, keep in earning interest with the company, use it to pay premiums, or reinvest it into your policy via the use of paid up additions.
Moving back to the theme of paid-up life insurance policies, you should know that there are two main types – paid-up additions and paid-up status. What does this mean?
There are certain beneficial whole life insurance riders that contribute to the overall performance of the policy. One in particular is paid up additions.
With this option attached to your whole life policy, you will be able to purchase additional paid up life insurance on any dividends earned. You use the whole life insurance policy dividends paid by the carrier to purchase extra paid up coverage, which contributes to your overall death benefit, while simultaneously increasing the cash value of your policy.
Furthermore, a paid up additions rider allows you to pay extra money into your policy in addition to your normally scheduled premiums. The extra portion will be applied to your death benefit and your cash value in the same way as the contribution to paid up additions from dividends.
Ultimately, using paid up additions makes for a quicker way to build the cash value whenever you have some spare money.
Paid-Up Life Insurance Status
On the other hand, you may have an opportunity to convert your whole life policy into a ‘paid-up’ policy and this is where you no longer have to pay the premiums but the insurance will remain in place. If you were to die, your beneficiary would still receive a certain percentage of the death benefit because you would have paid a certain amount of premiums up to that point in time.
Converting to Paid-Up Status
As the years go on, sometimes life insurance gets more and more difficult to afford or you start to question why you have it any longer. As a result, many people in your situation simply choose to cancel the life insurance policy.
However, you might not want to go the entire way and cancel the policy, which is why paid-up status exists. As long as your policy allows, you can stop paying premiums and use your existing cash value to purchase a paid up death benefit.
Be careful though because sometimes the company will simply use your available cash value and pay the premiums due. If that is the case, your death benefit will decrease as the cash value is being removed from the policy to pay premium payments.
How Does it Work?
As a proection against your policy lapsing, many policies have a built in lapse protection that uses the cash value to pay premiums. Instead of you paying premiums each month, money will be taken from the cash value to keep the policy open. Furthermore, your death benefit will also decrease over time. If you were to die, your family won’t get the full death benefit because the premiums taken from the cash value will be deducted from the overall death benefit.
If you have paid-up status with your life insurance, you should still earn dividends which is a bonus and these can be used to pay the premiums or purchase additional paid-up additions to boost the cash value and death benefit once more.
Rather than just stopping the direct debit and hoping for the best, you will need to contact the insurance company to see whether this is an option for you.
Unfortunately, not all insurance companies will offer this solution. If they do offer it, you should find out how to trigger the clause because you might have to formally request paid-up status in writing or over the phone.
Is It Worthwhile?
In truth, this all comes down to your needs and the position you find yourself in. If you have built up a good cash value but have now run into money problems or have even found that the life insurance is largely unnecessary, this is a good thing to do because it doesn’t completely remove the policy. Instead, you continue earning dividends and your loved ones will still receive a death benefit after death (although lower than first planned).
However, what if you actually want to go one step further? What if you no longer need or want the policy? The next post in this series will cover just that–how to cancel life insurance.
A brief word of caution against cancelling your policy
All too often people cancel their term life insurance or whole life insurance policy without considering their alternatives. This can be a costly mistake.
A convertible term life insurance policy can be valuable if you are nearing the end of the term or age 70. There are many life settlement and viatical settlement companies out there that will purchase your term life policy once you have converted it into permanent coverage.
If you have permanent life insurance of some type, consider selling it for more than the cash value in the policy but less than the death benefit.
There we have it, your ultimate guide to paid-up life insurance. If you take one thing away with you today, remember that life insurance is a unique process.
There is no one size fits all policy. Take time to think through what you need based on your own goals and objectives.
So, what are you waiting for? Give us a call today or visit our Online Life Insurance Quotes page and see what we can do for you!