If you’re one of the 40% of US adults whose life isn’t insured yet, then now is the time to consider getting a policy. The sooner you do (as in the younger you are), the more affordable your policy will be.
Aside from lower premiums, buying life insurance now gives you more time to build wealth.
That’s right. Especially if you get paid-up additions attached to a whole life insurance policy.
The question now is, what exactly are these “additions” and how do they work? What kind of extra benefits can you even get with these add-ons?
We’ll uncover the answers to all these questions below, so be sure to read on
What Paid-Up Additions Are All About
Paid-up additions (PUA) act as additional whole life insurance coverage. The policy owner purchases these as a rider for their current whole life insurance plan. Instead of paying extra premiums, however, they usually use their policy’s dividends.
With a PUA rider, both the policy’s cash value and death benefit go up considerably. PUAs themselves earn dividends, so they add up to the policy’s total cash value too. Since a PUA life insurance rider is already “paid-up”, you won’t have any more premium payments to make.
Breaking Down the Jargon
The PUA meaning we outlined above makes it sounds amazing and confusing at the same time, right? So, let’s break things down further with a brief definition of the jargon.
Whole Life Insurance
Whole life insurance is one of the types of permanent life insurance policies. It’s a lifelong coverage, meaning, it won’t expire, unlike term life insurance. So long as policyholders remain up-to-date with their premiums, they will receive coverage.
Whole life insurance policies come with a cash value component. This component is the money-generating feature of such permanent life policies. They are a portion of the premiums paid by the insured.
Some insurers invest part of the cash value into platforms like stocks and bonds. Others store the money into a sort of higher-yield “savings” account.
Over time, these “portions” will build up and accumulate compounded interest. Cash value refers to the money that has grown inside that account. It’s the money that you, as the policyholder, can use as a “living benefit”.
Meaning, you can withdraw from it, borrow against it, or even pay your premiums with it. Some insurers also let their policyholders get a PUA using their policy’s cash value.
What About Dividends?
Dividends are the distributed portion of a company’s profits, in this case, the insurer. The insurance company distributes some of these to a select group of policyholders. If you purchase a PUA rider for your life insurance policy, you’ll become part of this group.
Although not guaranteed, most established insurance companies pay this out every year.
How PUA Life Insurance Helps You Extract More Out of Your Policy
As is, the cash value of whole life insurance policies already gives you an extra source of funds. Most of these funds come from a policy’s guaranteed accumulation rate. This is the interest applied to the portion of your premiums used as your policy’s cash value.
The second source of funds is the dividends your insurer shares with you. Just like the cash value, dividends are also tax-deferred.
A PUA lets you augment these funds since you’re adding more money to your policy. As with your policy’s cash value, your additions also grow with interest. Your insurer also takes your PUA under consideration for dividends.
As such, a whole life insurance policy with a PUA rider earns more than a base policy. It’s not exactly twice or thrice more, but it does considerably add to your living benefit. In short, you’ll have more liquidity that you can enjoy while you’re still kicking and healthy!
Moreover, paid-up additions also increase the total death benefit of your policy itself. This means that your loved ones will receive a bigger amount from your policy after you pass away.
Paid-Up Additional Insurance vs A Secondary Policy
Paid-up additions are much like miniature versions of whole life insurance policies. However, since they’re part of an existing policy, you don’t have to go through the same buying process. You simply elect to structure the PUA into your current whole life insurance plan.
Whereas if you buy another life insurance policy, you may have to go through another medical exam. What’s more, your secondary policy will likely come with higher premium payments. The older you are, the more expensive your new life insurance policy will be.
Do note that a PUA may have a higher price tag than a base policy though. Keep in mind, however, that you usually pay for a PUA rider with dividends. Moreover, most PUAs come with a one-time and not a monthly payment.
Adding Even More PUAs To Your Existing Policy
Some insurers allow their policyholders to add a PUA at a later date. You do want to purchase a PUA as early as possible, but if not, then take advantage of this offer.
While you’re at it, be sure to ask your insurer how much exactly you can contribute to a PUA rider. Insurance companies have varying terms, but most will let you buy as much as you want. Many others will also let you increase an existing PUA over the years.
Maximize Your Whole Life Insurance With a PUA Rider
There you have it, everything you need to about paid-up additions of whole life insurance. Now that you know more about how it works, you can decide for yourself if it’s something you want to invest in too. If you do want to get the most bang from your buck, then a PUA rider can help you achieve that goal.
Ready for more pro tips on how to manage and strengthen your finances? Be sure to check out the rest of the guides under this site’s Money section then!