What is 'Paid-Up Additional Insurance'

Additional whole life insurance that a policyholder purchases using the policy’s dividends. Paid-up additional insurance is available as a type of whole life insurance rider. It lets the policyholder increase the policy’s living benefit as well as its death benefit by increasing the policy’s cash value. Paid-up additions themselves can earn dividends, meaning that their value compounds over time. The policyholder can also surrender paid-up additions for their cash value or take a loan against them. Doing so will reduce the policy’s cash value and death benefit, however.

BREAKING DOWN 'Paid-Up Additional Insurance'

The cash value of paid-up additions 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 can be an extra-valuable feature for a policyholder whose health has declined since the policy was issued and who can’t increase insurance coverage through other means. Even without medical underwriting, however, paid-up additional insurance may have a higher premium than the base policy because their price depends on the 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, though.

For two otherwise identical whole life insurance policies with the same annual premium - one with a rider for paid-up additions and one without - the one with paid-up additions 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 and possible decades for the two policies to have similar death benefits.

Only mutual insurance companies, which are member-owned, not shareholder-owned, issue dividends. Dividends are not guaranteed, but are generally issued annually when the company is doing well financially, and 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 her dividends to purchase paid-up additional insurance, she could instead use them to lower her premium.

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