What Is Paid-Up Additional Insurance?
Let me explain paid-up additional insurance to you directly—it's a form of whole life insurance where you, as the policyholder, use your policy's dividends to buy extra coverage. This boosts your death benefit and cash value without any additional premium payments or medical underwriting.
Understanding Paid-Up Additional Insurance
Think of paid-up additional life insurance as tiny segments of whole life insurance that you purchase using dividends from your main policy. Each of these paid-up additions, or PUAs, comes with its own death benefit and cash value, and they earn dividends too. This setup lets you steadily increase your policy's cash value and death benefit over time, all without needing medical approval or hiking your premiums.
These additions are fully paid up, meaning once you buy them, you don't owe any more premiums on them—unlike your base policy. They're small on their own, but as you keep using dividends to buy more, their value compounds because they generate their own dividends, which you can use to buy even more insurance. The result is a noticeable growth in your policy's overall value, giving you a bigger death benefit and more cash value.
Another key point is that these additions let you expand your coverage without medical underwriting. If your health has worsened since you got the policy, this is particularly useful because poor health could make new insurance expensive or impossible. These PUAs function like regular insurance, so you can surrender them for cash value or borrow against them as a nonforfeiture option.
Remember, you can only get PUAs in participating whole life policies that pay dividends. But dividends aren't your only option—you could use them to cut your premium, add to cash value, or just take them as cash.
PUA Rider
Many insurers offer a paid-up additions rider, or PUA rider, which allows you to pay extra premiums to buy more PUAs beyond what dividends alone would cover. This can supercharge your policy's cash value and death benefit, especially since the additions compound over time by earning dividends that buy even more insurance.
You need to include this rider when you first buy the policy, though some companies might let you add it later—but factors like your health and age could complicate that. Riders differ by company; some are flexible, letting you contribute varying amounts each year between set limits, while others require consistent payments or you risk losing the rider and having to reapply.
Example of Paid-Up Additional Insurance
Take two identical whole life policies with the same annual premium: one with a PUA rider and one without. The one with the rider might reach a higher guaranteed net cash value faster, but it starts with a lower cash value and death benefit. It could take years or decades for the death benefits to match, so view a policy with a PUA rider as a long-term approach to maximizing value.
For a specific case, imagine you're a 45-year-old man buying a whole life policy with a $2,000 annual base premium for a $100,000 death benefit. In year one, you add $3,000 to a PUA rider, which immediately boosts your cash value and adds $15,000 to the death benefit. Keep this up, and your cash value and death benefit will grow steadily over time.
Special Considerations
Dividends come only from mutual insurance companies, which are owned by policyholders. They're not guaranteed, but they're typically paid annually when the company performs well financially. Some companies have paid dividends every year for decades, so choosing one with that track record makes sense if you want reliable dividends. If you skip using them for PUAs, you can apply them to lower premiums, earn interest, pay down loans, or get a cash payout.
Don't confuse this with reduced paid-up insurance, which is a different nonforfeiture option. If your cash-value policy lapses, reduced paid-up insurance gives you a smaller amount of fully paid whole life coverage based on your age and the policy's cash value, resulting in a reduced death benefit compared to the original policy.
Key Takeaways
- Paid-up additional insurance is extra whole life coverage you buy with your policy's dividends.
- These additions are small, fully paid-up units of insurance.
- They earn dividends and compound in value over time.
- You can surrender them for cash or borrow against them.
- Many companies offer PUA riders to buy more additions with extra premiums.
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