What exactly does it mean when a life insurance policy is considered “paid up”? Is anyone able to have a paid-up life insurance policy and how do you even know if your life insurance policy has a paid-up option? What exactly are some of the benefits of having paid-up life insurance? All of these are good questions to ask about a paid-up life insurance policy and are important in understanding when making financial decisions pertaining to your financial future. Below, we’re explaining everything you need to know about paid-up life insurance.
What is a Paid-Up Life Insurance Policy?
To begin, it is important to be aware of what a paid-up life insurance policy is. Paid-up life insurance pertains to a life insurance policy that is paid in full, remains in force, and you no longer have to pay any premiums. While this sounds rather simple, it is actually a bit more complex. Paid-up life insurance is strictly an option only for whole life insurance policies.
A whole life insurance policy offers life insurance coverage for the whole life of the insured individual. Premiums are level and the death benefit is guaranteed as long as you continue to pay the policy premiums. In addition to whole life policies, they build up a tax-deferred cash value, which is basically savings, over the life of the policy. The cash value continues to grow in time with the premiums that you pay. If you surrender the policy earlier, you are then entitled to some of the cash value.
Another form of this would be a dividend-paying whole life insurance policy or a participating whole life insurance policy, in which your life insurance company will pay dividends to you. Dividends are a portion of the life insurance company’s profits that are paid to policyholders who, when they purchase life insurance, are investing in the growth of the life insurance company.
With paid-up life insurance, it comes in two forms:
- Paid-Up Status – You are able to convert a whole life insurance policy to a paid-up policy, in which this will allow you to keep the policy in force without continuing to pay the premiums. This means that your family will receive a portion of your death benefits if you die, but you will not have to continue to pay the premiums.
- Paid-Up Additions – Utilizing dividends that the policy earns to purchase additional coverage and grow additional cash value.
With your whole life insurance policy, you are able to convert it to paid-up status with ease.
How to Convert to Paid-Up Status
The majority of people purchase a whole life insurance policy with the best intentions, but over time the premiums can become rather difficult to pay, or the policy could not be an advantageous investment for much longer. With that being said, letting your policy lapse is never a good idea – especially after you have paid into it for several years and have accrued cash value. This is where you may be wondering if there is a way to keep your policy in force without continuing to pay premiums.
Fortunately, this may be an option for you, but only if your policy enables conversion to paid-up status. While this means that you do not have to pay any more premiums, technically you still have to pay to keep the policy in force. The paid-up life insurance policy enables you to keep your whole life insurance policy in force without continuing to pay premiums, but it is only an option if you have built up substantial cash value in your policy.
To simplify this, it basically means that your policy is kept in force by deducting the premiums from your cash-value account. While this means no more payments temporarily (or permanently), it also means that your death benefit decreases as well. If you were to pass away within the time period of your policy, then your family will still receive your death benefit, but only the amount that is left over after your premiums have been paid. Therefore if you choose to take the alternative route and surrender your policy or take out a loan, then this will also reduce the amount of funds available to you as well.
What Exactly are Paid-Up Additions
A paid-up addition is categorized as a miniature life insurance policy. The cash value is built up through the amount paid, in which if you pay $5, then you also accrue $5 in cash value. Paid-up additions also offer a death benefit and earn dividends/interest from the insurance company, which are then put into your cash value. These mini-policies are paid up, which means that they no longer require premiums or other costs. You will accumulate cash value over time and your family will receive the death benefit if you are to pass away. Overall, purchasing paid-up additions as an investment is an extremely financially sound decision for those that are seeking safe and tax-friendly growth.
Final Word on Paid-Up Life Insurance
Paid-up life insurance policies are policies that are paid in full, remain in force, and do not have any premiums owed. Paid-up life insurance is only an option, however, with whole life insurance policies. To convert your life insurance policy to paid-up status, please refer to your specific insurance policy or contact your life insurance agent.