As its name suggests, a paid-up life insurance is an insurance policy that’s paid up immediately and remains in force without the need to make any monthly premiums. How does a paid-up life insurance work? Is it better than continually paying for monthly premiums? How do you get a paid-up life insurance? Is it the best option for you?
How Does A Paid-Up and Whole Life Insurance Work?
Whole life insurance is a policy that offers lifetime coverage and the premiums can be paid up in one large initial payment or in installments for a specific period. It doesn’t have an expiration date and the policy will stay in effect until you cancel it or when you pass away. A whole life insurance is different from a paid-up life insurance. A paid-life insurance is an option for whole life insurance policies only. There are two ways to convert a qualified whole life policy into a paid-up life insurance:
- A whole life insurance policy is considered paid up once you meet specified premium payments.
- A whole life insurance policy can be changed into a paid-up life insurance if you decide to trigger its reduced paid-up feature.
Whatever method you choose, once you have a paid-up life insurance, the policy will remain in effect for the rest of your life. Additionally, your family will receive death benefits after your passing.
Can A Paid-Up Life Policy Eliminate Your Monthly Insurance Bill?
Yes. Once your whole life insurance is paid up, your monthly insurance premium will be eliminated. If you manage to meet the specified premium payment period, your insurance coverage becomes paid up. You no longer have to pay the premiums and your policy will remain in force. In case you trigger the reduced paid-up option, you don’t have to pay for the monthly insurance bills. However, the premiums will be deducted from the current cash value amount of your policy, which leads to a reduced cash value over time.
How Can You Convert Whole Life Insurance To A Paid-Up Insurance?
1. Satisfy The Premium Payment Period
The first method to convert whole life insurance to a paid-up insurance is by satisfying the premium payment period. The whole life insurance products available in the market today are considered paid up once the policyholder reaches a certain age or once they manage to pay for a predetermined number of years. Once you meet this requirement, your insurance coverage will no longer require premium payments and the policy will remain in place. It will continue to earn dividends and build cash value while making sure that your family will receive death benefits once you die.
2. Triggering The Reduced Paid-up Feature
If for some reason, you want to stop making premium payments or you’re no longer able to do so, you can trigger the reduced paid-up insurance feature of a whole life insurance policy. Your insurance provider will check your cash-value account and recalculate the death benefits your family will get when you pass away.
The reduced paid-up feature is set off by policyholders before they reach the specified premium payment period for the policy to be considered as paid up. Once this option is triggered, you’re no longer required to make monthly premium payments. Instead, the insurer will take out the premiums from your policy’s cash value, which results in reduced death benefits. For some, it’s a sensible trade-off, especially for those who can no longer afford to pay for the policy.
Will Your Policy Lose Dividends Once You Have a Paid-Up Life Insurance?
You will not lose your dividends once you have a paid-up life insurance policy provided that your coverage has been earning dividends before it was converted into a paid-up status. Dividends are a portion of the profits earned by the insurance company and are given to their policyholders. Whole life insurance policies generally pay dividends regularly.
You can use your policy dividends to purchase additional paid-up insurance. It can help increase your policy’s cash value over time, thereby increasing your living and death benefits as well. You can also take out a loan against your paid-up additions or surrender them for their cash value.
Is a Paid-Up Insurance Better Than Continuing Payment of Premiums?
Benefits of a Paid-Up Life Insurance
- Insurance policy is in force without having to continue paying the premiums.
- Your beneficiaries will still receive death benefits after your passing.
- It helps keep your expenses down during retirement.
- It makes budgeting a bit easier.
Drawbacks of a Paid-Up Life Insurance
- Every premium payment is taken from the cash value of your policy, but not in the case of one that’s paid in full upfront.
- Your cash value account will reduce every time a premium payment is deducted.
- The death benefit paid to your family will be reduced.
- The funds available to you will be reduced if you decide to cash in or surrender the policy.
Pros of Continuing Payment of Premiums
- You’re fully covered as long as you keep paying premiums.
- You increase your policy’s cash value, which you can borrow against or cash in.
Cons of Continuing Payment of Premiums
- Your coverage lapses if you fail to make regular premium payments.
- Premiums may be expensive if you have an unstable source of income. The amount you need to pay stays the same, but you’ll have to find other ways to meet this financial obligation, which can be stressful.
- Added expenses if you’re living on a limited budget.
Can You Cash In or Surrender a Paid-Up Life Insurance?
Yes, you can cash in or surrender a paid-up life insurance policy. The amount of funds that will be available to you will be what’s left after taking out the payment premiums from your cash value account following the conversion of your coverage into a paid-up insurance policy. You can use a paid-up life insurance calculator to determine how much you’ll get once you surrender your policy.
Why Should You Consider Getting a Paid-Up Life Insurance?
You get to enjoy the benefits offered by an insurance policy as long as you continue paying its premiums. You’ll have no problem making monthly payments as long as you have a stable source of income.
What if your financial circumstances have changed? Let’s take retirement as an example. During this time, you’ll probably rely on your benefits and your income won’t be as sizable or as stable as it was when you’re still working. If you don’t pay your insurance premiums, your coverage will lapse and you’ll have no protection.
A paid-up life insurance policy will provide you with the coverage you need but without the burden of having to make regular monthly payments, provided that you have accumulated a predetermined cash value in your insurance policy.
When is the Perfect Time to Buy a Paid-Up Life Insurance Policy?
It’s better to purchase life insurance at a young age. It also applies to paid-up life insurance policies. However, the premiums are usually higher, especially during the premium payment years. Purchasing a paid-up life insurance policy at a younger age gives you better chances of fulfilling the premium payment period since you’ll most likely have a stable source of income during that time. Your policy will be paid up by the time you reach your retirement years.
The perfect time to trigger a paid-up life insurance policy varies from one person to another. If you’re financially stable enough to satisfy the premium payment period of your whole life insurance, you don’t have to worry about anything else when it comes to taking out a paid-up life insurance policy. There’s no need to make monthly payments, your policy continues to accumulate cash value, your death benefits are intact, and your policy is in force.
But if you encounter a financial hardship or you’re in your retirement years living on a limited budget, insurance premiums are an additional expense you may no longer afford. If you find yourself in that situation, it may be a good idea to trigger the reduced paid-up life insurance. It’ll eliminate the monthly insurance bills while still having a guarantee that your family will receive a portion of the death benefits once you pass away.
Is a Paid-Up Life Insurance Right for You?
Do you have a whole life insurance policy? Do you want to keep it in force? Are you having problems paying the premium? If your answer to all these questions is yes, then you should consider getting a paid-up life insurance. If you’re qualified, you’ll no longer have to worry about making regular premium payments since they will be taken out from the policy dividends while still making sure that your beneficiaries will get some compensation in case something happens to you.
Conclusion
A paid-up life insurance policy is an option worth considering if you currently have a whole life insurance policy. If you no longer have the cash to pay the monthly premiums, you should think about converting your whole life to a paid-up insurance so that you can keep the insurance policy in force. Even so, you need to remember that the death benefits that your family gets after your passing will be reduced since the payments for your paid-up insurance policy are taken from its accumulated cash value. Likewise, you need to make sure that your policy comes with a paid-up option before you stop paying the premium. Consult with your life insurance agent for more information and for help in deciding whether this type of policy best suits your needs.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
