 Personal Finance PowerPoint Presentation Paid Up Additional Insurance Prepare to get financially fit by practicing personal finance Insurance is part of our long term risk mitigation strategy where we follow the adage of measure twice cut once putting a formal process in place looking something like set the goals develop a plan to reach them put the plan in action review the results and repeat the process periodically most of this information can be found at Investopedia what is paid up additional insurance which you can find online take a look at the references resources continue your research from there this by Adam Hayes updated November 11th 2021 in prior presentations we've been taking a look at insurance in general then moving to the life insurance keeping in mind the two major categories of life insurance that being the term life insurance pure life insurance typically the cheaper life insurance and then the permanent life insurance and now we're looking at what is paid up additional insurance usually that falling into the category under the permanent life insurance so as we're thinking about these kind of categories and components you always want to be comparing in contrasting to the pure life insurance the term life insurance and comparing your strategy to the strategy of why don't I invest in the term life insurance which is typically cheaper or purchase that and then invest the difference in something like a 401k plan or an IRA or something like that is there some added strategy that I have to have more complex instruments for the life insurance keeping that in mind what is paid up additional insurance paid up additional insurance is additional whole life so we're looking at the whole life which is part of the permanent side of things insurance coverage that policyholders purchases uses using the policies dividends instead of premiums paid up additional insurance is available as a writer on a whole life policy it lets policyholders increase their death benefit and living benefit by increasing the policies cash value the cash value being that kind of investment component when we're talking about a whole life policy which is under the category of the permanent insurance as opposed to the term or pure insurance so paid up additions themselves then earn dividends and the value continues to compound rapidly over time the policyholder can also surrender paid up additions for their cash value or take a loan against them so we talked about some of the benefits of having that cash value in terms of possibly if you need to get access to it you might be able to take a loan against it using that cash value as collateral for example understanding paid up additional insurance the cash value of paid up additional insurance can increase over time and these increases are tax deferred so remember you got this kind of tax deferred component but you also want to keep in mind that if you want to compare that to term insurance which doesn't have the cash value but which is typically cheaper you'd be saying well why don't I purchase the cheaper term insurance and invest the difference where I could possibly get tax benefits such as putting it into an IRA or 401k possibly have more complex tax strategies than that but you want to keep those in mind as a comparison another benefit is that the policyholder can use them to increase coverage without going through medical underwriting that could be beneficial because the medical underwriting if there's higher health risks then could impact what the premiums would be if you had to go through that to make any adjustments this is not only convenient but also extra value for a policyholder whose health has declined since the policy was originally issued and who can't increase insurance coverage through other means because of that health condition which obviously would increase the risk to the insurance company that you're going to die which wouldn't be good for the life insurance company so even without medical underwriting paid up additional insurance may have a higher premium than the base policy because the price depends on the policyholders age at the time they purchase the extra insurance so even if you don't go through any more medical underwriting you're still older of course and just the age without the other medical conditions and so on might be might be enough then to increase the premiums at that point so some policies such as those issued by the veterans administration have no premiums for paid up additions so if you take two if you take two otherwise identical whole life insurance policies with the same annual premium but one has a paid up writers we're talking about this writer and one doesn't the one with the writer will have a higher guaranteed net cash value sooner than the one without however a policy that allows for paid up additions may initially have a lower cash value and much lower death benefit so it will take many years possibly decades for the two policies to have similar death benefits so you can see kind of the pros and cons as as you know the cash value builds up basically over time and the relationship between the cash value and the death benefit which is the amount that is paid out in the event of death by the insurance company so a paid up additional insurance writer must be structured into the policy when you purchase it so if you want that writer then that's something you got to be considering at the purchase point and again you want to think about these kind of things before you purchase them because when you're talking to an insurance company you're talking to basically a sales agent so the more kind of writers and stuff involved more likely more expensive policy will be and if they're making a commission on it then they may be likely that they're going to be advising those things so you want to have your own strategy and mind possibly making your strategy with someone other than say the insurance company or insurance broker and so that so that you could go in knowing what's best you know for you as you're looking at these different tools so some companies may allow you to add it later but health age and other factors could make it more difficult policies for paid up additional insurance can vary among insurance companies for some the paid up addition writer allows you to contribute as much or as little as you want from year to year other companies stipulate that contributions remain at constant levels or you might risk losing the writer and be forced to reapply for it in the future so special consideration dividends only member owned mutual insurance companies issue dividends are not guaranteed but they are generally issued annually when the company is doing well financially some insurance companies have such a long history of annual dividend payments that dividends are virtually guaranteed if policy holders do not want to use their dividends to purchase paid up additional insurance they could use them instead to lower the premium a reduced paid up insurance reduced paid up insurance is a non forfeit option that allows the policy owner to receive a lower amount of fully paid whole life insurance excluding commissions and expenses so the attained age of the insured will determine the face value of the new policy as a result the death benefit is similar than that of the lapsed policy paying premiums with cash value a policy caller can opt to roll the cash value of their whole life policy into paid up insurance in such a scenario the policy is not necessarily paid up in the strict definition of the term but it is capable of making its own premium payments depending on the type of policy and how well it is it has performed a policy holder may have to resume premium payments in the future or it may reach a point where the premiums are covered for the rest of the life of the policy by the cash value so example let's take a look at example of a paid up additional insurance so consider a 45 year old male who purchase a whole life policy with an annual base premium of $2,000 for a $10,000 death benefits of $2,000 the death benefits the amount that would be paid out for the insurance component on the time of death to the beneficiary at the first year of the policy he decides to contribute additional $3,000 to a paid up additional writer so put the added $3,000 in the paid up additions will give him an immediate cash value of $3,000 so now you got that cash value in play while adding $15,000 to his death benefit death benefit increasing there if he continues to purchase paid up additions he will continue to increase his cash value in death benefit as time goes on