What is a Paid Up Life Insurance Policy?

March 30, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

Paid-up life insurance is not a new type of life insurance policy so much as it is an option for whole life insurance. If your life insurance policy is paid up, it means you don’t have to pay any more premiums on it.

There is also something known as reduced paid-up option. If you have a whole life policy, and no longer want to pay premiums on it, you can make the policy paid-up but with a lower death benefit. This is called reduced paid-up insurance.

Paid-up insurance is pretty straightforward. If the policy can become paid up is dependant on the insurance policy. Only limited pay policies can be paid up. Limited pay policies are can be purchased before the age of 55 and are generally paid up at age 65.

Let’s say you buy a limited pay whole life policy when you’re 30 and pay premiums of $6000 a year until you’re 65 and the death benefit is $250,000. When you turn 65, your life insurance policy should be paid up. You will not have to pay anything more on the policy, and when you die, your heirs get the entire $250,000, plus any cash value you’ve accumulated. Even if you live to be 103, you will not pay any more premiums, and as long as you don’t take out loans against it, the cash value will continue to grow.

Paid-up life insurance is only an option with whole life insurance. Term life insurance doesn’t guarantee any death benefit --if you outlive the policy and don't renew, you don’t get anything. Guaranteed universal life insurance is tied to market rates and might not earn you any cash value, although you are guaranteed coverage for your entire life (as long as you pay the premiums). 

  • Paid-up life insurance is when your policy is still active but you don’t owe premiums
  • There are paid-up additions you can purchase for extra insurance
  • Reduced paid-up insurance may be an option

Converting to a reduced paid-up policy

Whole life insurance is quite expensive, with premiums as much as ten times higher than term insurance rates. Although everyone who buys a whole life insurance policy has every intention of paying for it every month, sometimes life springs unexpected expenses on you and something has to give. If you can no longer afford your whole life insurance policy, you could:

  • Let the policy lapse
  • Surrender the policy for the cash value you’ve accumulated 
  • Convert to reduced paid-up status

If you’ve built up a substantial amount of cash value in the policy, you could either surrender it or convert it to reduced paid-up status. You need to have a reduced paid-up option on your policy. What this means is that the premiums will be paid out of the cash value you’ve built. Your insurance company will calculate how much you’ve paid in premiums, the cash value you’ve built, and you age and then reduce the death benefit by a certain amount. 

Keep in mind that if you surrender the policy for the cash value, the money could be taxed. This occurs when the total premiums paid is less than the cash value. And letting the policy lapse should only be considered if you’re in dire financial straits and no other option is available. 

Paid-up Additions

Many whole life insurance policies pay dividends. A dividend is a mutual company's way of sharing the profits with their policyholders. Paid-up additions are extra life insurance you can purchase using your dividends. You must have a rider to purchase paid-up additions and you must have a whole life insurance policy--you can’t purchase paid-up additions without one. 

You can purchase paid-up additions (PUA) by either paying extra money in premiums or by using the dividends earned by the policy to buy extra insurance. In addition, if you have a paid- up additions rider on your policy, some insurance companies will require you to buy paid-up additions or forfeit the right to buy any ever again. 

There are two types of paid-up additions. 

  • Level paid-up additions
  • Flexible paid-up additions

Level paid-up additions are a set amount of paid additions you will purchase on a policy every year. You can sometimes adjust the amount down, but you can’t increase it.

Flexible paid-up additions allow you to vary the amount of paid-up additions, within a certain range. Since paid-up additions increase the cash value and the death benefit, insurance companies like to limit the amount of death benefit your insurance will pay out if you die. This prevents people with terminal diseases from shoving all the money they can find into a paid-up addition. 

The money you use to purchase paid-up additions will allow older adults to buy additional insurance without a medical exam or an increase in premiums. However, the older you get, the less additional life insurance that same amount of money will purchase, so it’s like an increased premium. 

Paid-up additions are for people who have extra money to invest, and want the tax advantages of additional life insurance. 

Guaranteed Universal life insurance

While whole life insurance is the only policy that qualifies as paid-up insurance, guaranteed universal life insurance (GUL) has some of the same features. Universal life insurance also has a cash value component, and the amount of interest you earn fluctuates with the performance of the market. Whole life insurance has a guaranteed interest rate that you earn. Whole life insurance has level premiums, while guaranteed universal life insurance has premiums that fluctuate. 

Guaranteed universal life insurance means that your policy won’t lapse, even if the amount of cash value in the policy reaches zero. If you’ve paid for the entire term of the policy, technically, this would be paid-up insurance. 

Given that GUL is significantly less expensive than whole life insurance, if you want coverage that lasts your entire life and don’t care as much about the cash value, it might be worth considering a GUL policy. 

Last thoughts

If you are the owner of a whole life insurance policy, it’s worth it to check to see if a paid-up additions rider was built into it. This allows you to put extra money into the cash value and the death benefit, with some nifty tax advantages. In addition, if premiums become unwieldy, consider a reduced paid-up