Paid Up Additions: Supercharge Your Whole Life Insurance Cash Value

Benefits of Paid-Up Additions

Increase Your Cash Value

The main benefit of paid-up additions is significantly accelerated cash value accumulation and growth. Check out the illustration of a whole life policy’s cash value chart with PUAs versus a policy designed primarily for death benefit, and you’ll notice a sizeable difference.

Initially, a policy designed for maximum early cash value growth will have a lower death benefit. However, over time, the death benefit will continue to grow at an accelerated pace.

Accrue Interest vs. Paid Up Additions

Should you use your dividends to accrue interest or use them to purchase paid-up additional insurance?

• If you leave your dividends with the insurer to receive interest, that interest will be taxable.
• Alternatively, using dividends to purchase additional paid-up life insurance allows you to grow your cash value and death benefit in a tax-favored environment under IRC 7702.
• You can then use your cash value tax-free via a life insurance policy loan.

Since taxes are perhaps the #1 wealth destroyer, taking advantage of tax incentives in the IRC is usually the best route. This is why dividend-paying mutual insurance companies remain popular with financially savvy individuals.

Increasing Death Benefit and Cash Value

Using dividends to purchase paid-up additions is typically the default and most popular option for policyholders. The reason is simple: the additional coverage also pays dividends, which in turn purchase more insurance, which then pays more dividends, creating a powerful compounding cycle.

All the while, your policy cash value grows at an accelerating pace. That’s why I like to say that paid-up additions are the fast track for those with a slow and steady strategy. You still have the safety and consistency of a cash value life policy, but with a powerful growth accelerator built in.

How to Design a Whole Life Policy with Paid Up Additions

High cash value whole life is only as good as the policy design. Traditional whole life insurance focused on the death benefit, with the cash value portion being secondary. But whole life designed for early high cash value accumulation prioritizes cash value growth over death benefit.

Optimal Policy Structure

There are different ways to design and structure a whole life policy. Based on your individual needs, a policy may be designed in several different ways. The most popular designs blend base premiums and paid-up additions with these ratios:

The most effective policy designs often incorporate a term insurance rider in the first few years to keep the policy from becoming a Modified Endowment Contract (MEC) while maximizing PUA contributions.

Does that mean these are the ideal blends for your whole life policy? Of course not. The key is speaking to one of our Pro Client Guides who can help design the best high cash value whole life insurance policy based on your specific financial situation and goals.

Avoid the MEC

It’s important to note that you can only put so much money into your policy. An over-funded policy transforms into a modified endowment contract (MEC). If your policy “MECs,” you will lose some of the tax advantages of permanent life insurance.

The good news is you can avoid “MEC’ing” your policy by paying attention to correspondence from your insurance provider. Your insurer will provide ample time to remedy the situation and prevent your policy from changing into a MEC.

Paid-Up Additions Dividend Option

Not to be confused with the paid-up additions rider is the paid-up additions dividend option. Whereas the rider must be added to the whole life policy, the dividend option to purchase paid-up additions is a separate feature.

Life insurance dividends allow you to choose different options, such as:

• Taking the cash out (taxable)
• Reducing premium payments
• Accruing at interest (taxable)
• Buying additional paid-up life insurance (tax-advantaged)

We strongly recommend choosing the dividend option to purchase paid-up additions if your goal is to maximize cash value growth.

When both paid-up additions options—the dividend paid-up additions option and the separate paid-up additions rider—are used together, you create the optimal environment for maximum cash value accumulation and compound interest growth.

Exclusive to Whole Life Insurance

Other types of life insurance coverage, such as term life insurance and universal life insurance, do not offer paid-up additions. Only participating whole life policies from mutual insurance companies provide this powerful feature.

Having said that, other types of coverage, such as IUL insurance policies, have their own methods for building cash value.

That’s why it’s important to compare whole life vs. universal life to ensure you’re getting the best policy for your specific needs, goals, and objectives.

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Potential Drawbacks to PUAs

Fees

Paid-up additions can be defined as additional insurance that is paid in full at the time of purchase, minus a deducted amount the insurance company charges as a load fee.

Load fees vary by insurance company and can range from 4% to 9%, with certain unfavorable insurers reserving the right to raise fees up to 20%.

Example: If you have a $100,000 life insurance policy and purchase an additional $30,000 worth of insurance by paying a lump sum of $10,000, the lump sum includes all fees and expenses required to cover the additional $30,000 death benefit.

The policyholder is not required to pay anything beyond the lump sum because the coverage has been paid in full, or “paid up.”

Contribution Limits

Most policyholders may still be paying premiums on the original policy, but they may suddenly need to add coverage (perhaps after having another child and wanting to increase the death benefit).

The paid-up addition rider allows you to add coverage to an existing policy without proving insurability, which means no health questions or medical testing is required.

For this reason (no evidence of insurability required), life insurance companies protect themselves with caps that limit the amount of paid-up additions a policyholder can buy at any particular time.

Insurance companies implement these caps to prevent policy owners with declining health from massively increasing their death benefit through paid-up additions.

PUAs for Infinite Banking

If you’re familiar with the infinite banking concept®, you know that paid-up additions are an essential ingredient in a properly structured banking policy.

By purchasing additional paid-up insurance, you accelerate cash value growth. Your cash value directly affects your ability to utilize the policy for banking strategies.

As your cash value grows, you use your cash value life insurance as an asset to purchase other assets. Then you would use the cash flow from those additional assets to repay your policy loan, with interest.

Key Benefits of Paid-Up Additions for Infinite Banking:

• Faster cash value growth – Accelerates your banking capabilities
• Tax-advantaged environment – Grow your money without tax penalties
• Compounding effect – Dividends purchase more insurance which earns more dividends
• No medical underwriting – Add coverage without health exams

That is why whole life insurance is a great vehicle for a real estate wealth-building strategy.

The paid-up additions rider allows you to put more money into your policy than you borrowed out. This provides a tax-favored environment for your money, which also offers creditor protection depending on your state of residence.

Purchase Paid Up Additions Rider (PUAR) at Policy Outset

It’s important to note that you will likely want to add the rider at the same time you purchase the original life insurance policy.

Some companies may allow you to add the rider at a later time, but not all will. And even if they will, there will likely be the hurdle of medical underwriting to go through.

And one huge benefit of paid up additions is you can buy paid up additional insurance without having to go through medical underwriting.

In addition, keep in mind that not all riders are as flexible as others. Some paid up addition riders will allow you to add quite a lot, or very little, each year.

While others will require that you maintain a certain level of contribution each year in order to keep from losing the rider altogether.

Just make sure you are aware of the various rider options for adding coverage down the road.