What is 'Paid-Up Additional Insurance'

Paid-up additional insurance is additional whole life insurance that a policyholder purchases, using the policy’s dividends. Paid-up additional insurance is available as a rider on a whole life policy. It lets the policyholder increase their living benefit and death benefit by increasing the policy’s cash value. Paid-up additions themselves then earn dividends, and the value continues to compound indefinitely over time. The policyholder can also surrender paid-up additions for their cash value or take a loan against them.

BREAKING DOWN 'Paid-Up Additional Insurance'

The cash value of paid-up additional insurance can increase over time, and these increases are tax-deferred. Another benefit is that the policyholder can use them to increase coverage without going through medical underwriting, which is not only convenient, but also extra-valuable for a policyholder, whose health has declined since the policy was originally issued...and who can’t increase insurance coverage through other means. Even without medical underwriting, paid-up additional insurance may have a higher premium than the base policy because the price depends on a policyholder’s age at the time he or she purchases the extra insurance. Some policies, such as those issued by the Veterans Administration, have no premiums for paid-up additions.

If you take two otherwise identical whole life insurance policies with the same annual premium, but one has a paid-up rider and one doesn't, the one with the rider will have a higher guaranteed net cash value sooner than the one without. However, a policy that allows for paid-up additions may initially have a lower cash value and much lower death benefit. It will take many years, possibly decades, for the two policies to have similar death benefits.

Only member-owned mutual insurance companies issue dividends. Dividends are not guaranteed, but are generally issued annually when the company is doing well financially. Some insurance companies have such a long history of annual dividend payments that dividends are virtually guaranteed. If a policyholder does not want to use their dividends to purchase paid-up additional insurance, they could use them instead to lower the premium.

Adding the Paid-Up Additional Insurance Rider

A paid-up additional insurance rider must be structured into the policy when you purchase it. Some companies may allow you to add it later, but health, age and other factors could make it more difficult.

Differences in Flexibility

Policies for paid-up additional insurance can vary among insurance companies. For some, the paid-up additions rider allows you to contribute as much or as little as you want from year to year. Other companies stipulate contributions remain at consistent levels, or you might risk losing the rider and be forced to reapply for it in the future.

Paid-Up Additional Insurance Example

Consider a 45-year-old male, who purchases a whole life policy with an annual base premium of $2,000 dollars for a $100,000 death benefit. In the first year of the policy, he decides to contribute an additional $3,000 to a paid-up additions rider. The paid-up additions will give him an immediate cash value of $3,000 while adding $15,000 to his death benefit. If he continues to purchase paid up additions, he will continue to increase his cash value and death benefit as time goes on.

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