While many people are familiar with the term “paid-up life insurance,” some mistakenly assume that it is a type of policy they can purchase outright—such as a term or universal life policy. This article will attempt to clear up any confusion that exists by explaining what “paid-up insurance” actually means, how you get it, and why it can be such a valuable tool.
Let’s set the record straight on paid-up life insurance.
While many people think “paid-up life insurance” is a type of policy they can purchase, it’s actually a state or condition where your coverage is paid-in-full (fully funded) and you do not need to make any additional premium payments in order to maintain the policy. Since this can be an attractive feature for many policy owners—especially those who are looking to control costs in the future—it’s important to remember that this option is usually available only on whole life policies.
Three ways to fully fund your policy.
There are several ways to fully fund your policy (pay if off faster). Since each operates very differently, let’s take a moment to explore three options:
- Customize your policy to pay fewer premiums:Some whole life policies, such as our Custom Whole Life insurance, allow you to choose your premium-payment period and accumulate cash value faster than others. As a result, you may be able to fully fund your policy in as little as five to 10 years. Of course, the fewer payments you make the higher each premium will be.
- Convert to reduced paid-up insurance: If your need for coverage changes in the future, you may be able to use your dividends and any available cash value to purchase a portion of your coverage and thereby reduce your future premium payments. If you choose this option, it’s important to realize that the death benefit protection you receive will be substantially lower than the original face amount of the policy. A New York Life financial professional can give you all the details.
- Capitalize on paid-up additions:Since many whole life policies are eligible to earn dividends,1you can use this resource to purchase additional coverage. Because the cost of this additional coverage is completely funded by the nonguaranteed dividends, it can increase your level of protection without any increase in premiums. What’s more, this additional coverage is also eligible to earn dividends, so your policy’s value grows faster each time dividends are declared.
Here’s how paid-up additions work.
As you can see from the example below, a whole life policy features a guaranteed death benefit2, which is the face value of the policy at the time it is purchased. Each time dividends are declared, you can use them to purchase more coverage and increase your total death benefit protection.
Should you “pay off” your life insurance early?
There are lots of reasons why you may want to pay off (fully fund) your coverage: an increased or decreased need for coverage, future budgetary concerns, or the desire to build cash value faster are just a few. But as we’ve seen, the way to go about it can have a major impact on your level of protection. That’s why it is so important to consult a New York Life financial professional before making any decision.
Frequently Asked Questions
*New York Life Insurance Company is the issuer of New York Life Whole Life. In Oregon, the Whole Life policy form number is ICC18217-50P (4/18).
1Dividends are available on participating whole life policies and are not guaranteed. When declared, dividends are awarded annually.
2Any guarantees of the policy are based on the claims-paying ability of the issuer.
FAQs
The policy becomes paid-up once the policy owner satisfies the premium payments necessary for paid-up status. Once the policy is paid-up, it's guaranteed to remain in effect for the rest of the insured's life. Whole life insurance policies come with a schedule of required premiums.
Are paid-up additions a good idea? ›
Benefits of paid-up additions
The benefit of reinvesting paid-up additions into your life insurance policy is that, without paying additional premiums or going through underwriting, you can: Increase your death benefit. Further grow your tax-deferred cash value.
What does it mean when a whole of life policy has been made paid up? ›
A fully paid-up policy means that all your premium obligations have been paid within a certain period of time. This type of policy can offer numerous benefits, providing you and your heirs with financial security and peace of mind.
Can you cash out a paid-up life insurance policy? ›
You can cash out a life insurance policy. How much money you get for it will depend on the amount of cash value held in it. If you have, say $10,000 of accumulated cash value, you would be entitled to withdraw up to all of that amount (less any surrender fees). At that point, however, your policy would be terminated.
Is paid up life insurance worth it? ›
There are lots of reasons why you may want to pay off (fully fund) your coverage: an increased or decreased need for coverage, future budgetary concerns, or the desire to build cash value faster are just a few.
Can I surrender fully paid up policy? ›
Currently, policyholders can surrender their policies at any time during the term, provided that two full years' premiums have been paid. These new regulations are expected to increase the overall surrender value for customers and have to be implemented by September 30, 2024.
Can you borrow from paid up additions? ›
If you're ever in need of extra cash, you can surrender paid-up additional insurance at any time in exchange for the cash value. This won't impact the original policy. Alternatively, you can also borrow against the cash value of PUAs.
What is the true of a paid up policy? ›
A life insurance policy in which if all the premium payments are complete and the insured is free of all payment obligations, the policy stays intact until insured's death or termination of the policy is called paid-up policy. Description: Paid-up policy falls into the category of traditional insurance plans.
What are the benefits of paid up additions? ›
There are many types of life insurance riders, which offer increased benefits and protection, often for an additional fee. The benefit of a paid up insurance additions rider is more cash value in your insurance policy and faster growth from dividends and guaranteed interest payments.
What is an example of a paid up life insurance policy? ›
A single-premium life insurance policy would technically be a paid-up policy, for example, because the policy owner paid in full with that single, lump-sum premium.
“Fully paid up” means, just that. You have made enough premium payments to cover the cost of insurance for the rest of your life.
How many years does it take to pay up a whole life insurance policy? ›
Generally, people seeking whole life insurance pay for it forever (i.e., until they die). But, you can choose to fund the entire cover in 10, 15, or 20 years. Although, doing so will extortionately raise your monthly premium for those years.
Can you borrow from a paid up life insurance policy? ›
You can borrow against a life insurance policy only after a substantial cash value has built up, which generally takes several years. The timeframe will depend on your policy's terms, premium amount and performance if it's linked to investments.
What happens to the cash value after the policy is fully paid up? ›
What happens to the cash value after the policy is fully paid up? The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums.
What is the cash value of a $100,000 life insurance policy? ›
However, most people receive around 20% of the face value on average, according to LISA. So, if we're using that 20% average to calculate the cash value of a $100,000 life insurance policy, the cash value of the policy would be $20,000.
Do you get your money back at the end of a whole life insurance? ›
Yes, you can, although the only way to get back all your premium payments is to do so during the initial “free look” period. However, depending on the policy type and circ*mstances, you may receive some money from surrendering a whole life policy that has accumulated sufficient cash value.
How long does it take for whole life insurance to build cash value? ›
A whole life insurance policy will begin building cash value as soon as you pay your first premium, and it will continue building throughout the life of the policy as long as there are funds in the account.
What happens at the end of whole life insurance term? ›
This is insurance you buy for the length of your life. Unlike term insurance, whole life policies don't expire. The policy will stay in effect until you pass or until it is canceled. The initial cost of premiums is higher than it is with term insurance because of the length of the policy.
