If you happen to be looking for the best life insurance companies that offer the opportunity to build high early cash value you’ll want to be familiar with the Paid Up Additions rider (PUA or PUAR).
This rider, also known as an enricher rider, or additional life insurance rider, is an essential component of a properly designed dividend paying whole life insurance policy focused on cash value accumulation.
Paid up additions are exclusive to a certain type of participating whole life insurance.
So, let’s start with the basics of the PUA rider.
What are Paid-Up Additions?
[Fast Track Your Cash Value]
Paid Up Additions Rider DEFINITION: A rider that allows the owner of the life insurance contract to make additional contributions to the policy, resulting in the addition of paid up life insurance, which increases the death benefit and cash value.
By including a paid-up additions rider in your policy, it allows you to make purchases of paid-up additional insurance with no proof of insurability, increasing the cash value and death benefit proportionately.
The additional paid up life insurance can earn life insurance dividends, which compounds the cash value growth inside the policy.
Avoid the MEC
However, it should be noted that you can only put so much money into your policy. An over-funded policy transforms the policy 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, as your insurer will provide you 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 paid up additions is the paid up additions dividend option. Whereas the rider to the whole life policy must be added, the dividend option to purchase paid up additions is a separate feature of the policy.
Life insurance dividends allow you to choose different options, such as taking the cash out or buying additional paid up life insurance.
Once again, additional paid in full whole life insurance using policy dividends is separate from the paid-up additions rider.
We strongly recommend choosing this dividend option if your goal is to maximize cash value growth in your policy.
When the two paid up additions options, the dividend paid up additions option and the separate paid up additions feature, are used in conjunction with each other you have a recipe for maximum cash value accumulation and growth, in an environment conducive to true compound interest growth long term.
Exclusive to Whole Life Insurance
Other types of life insurance coverage, such as term life insurance and universal life insurance, do not include paid-up additions. Only participating whole life policies offer the paid up additions feature.
Having said that, other types of coverage, such as IUL insurance policies, have their own inherent ways to build high cash value.
That is why it is important to compare whole life vs universal life to make sure you are getting the best policy for your specific needs, goals and objectives.
How Paid Up Additions work
You can purchase paid up additions by making an extra premium payment on a set schedule, typically on an annual basis.
If you want to add apart from the scheduled times set by the life insurance company you may have to provide evidence of insurabilty, i.e. submit to an exam.
We’ve discussed cash value life insurance and the tremendous benefits to policyholders. For the typical whole life policyholder the premium is fixed and the amount of cash value that accrues each year is rather slow and consistent.
You may have heard the phrase, slow and steady wins the race referring to the typical whole life insurance strategy for retirement.
But what if you want to rapidly accelerate the growth of your cash value? This is where the paid up additions rider comes into play.
A policyholder can continue to add coverage AND cash value by utilizing this rider. And they can do so without going through medical underwriting (which is of tremendous benefit considering most people have health that deteriorates as they get older).
Life Insurance Companies Paid Up Additions
The following life insurance companies offer Paid Up Additions. Companies are listed in alphabetical order.
- American United Life
- Guardian Life
- Lafayette Life
- Mutual Trust Life
- New York Life
- Northwestern Mutual
- Ohio National
- Penn Mutual
Benefits of Paid-Up Additions
Increase Cash Value
The main benefit to paid up additions is to increase the cash value accumulation and growth of a whole life insurance policy.
Check out the illustration of a whole life policy’s cash value chart with PUAs versus a policy designed for the death benefit and you will notice a sizeable difference in the cash value growth of the policy with paid-up additions.
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.
Accrue Interest vs Paid Up Additions
Should you use your dividends to accrue interest or use your dividends to purchase paid up additional insurance?
If you leave your dividends with the insurer to receive interest, the 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 out there, taking advantage of tax incentives in the IRC is usually the best route to take.
Mutual Insurance Companies
Many people are insured by dividend paying mutual insurance companies (these are life insurance companies where the policyholders are partial owners of the company – or perhaps I should say “mutual” owners).
A mutual life insurance company will offer annual dividends as a share of the company’s net profit (after claims, expenses and investment gains are figured out).
The life insurance dividends can be taken as cash, used to pay future premiums, or to purchase additional coverage using the paid up additions rider.
Increasing Death Benefit and Cash Value
This last option, using dividends to purchase paid up additions, is typically the default, and most popular, option for policyholders.
The reason being that the additional coverage also pays dividends, which in turn purchase more insurance, which then purchases more coverage, which again pay dividends – rinse – repeat. A
ll the while the policy cash value grows and grows.
That’s why I like to say that paid up additions are the fast track for those that have the slow and steady strategy. You still have the safety and consistency that comes from a cash value life policy, but you can give it a shot of adrenaline by using the paid up additions rider.
By purchasing additional paid up insurance you are growing your cash value. Your cash value growth directly effects your ability to utilize the policy for banking.
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 the additional assets to repay your policy loan, with interest.
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 then you borrowed out. This provides a great 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.
Potential Drawback to PUAs
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 against paid-up additions.
The typical load fee varies by insurance company and can range from 4% to 9%, with certain unfavorable insurers reserving the right to raise fees up to 20%.
For example, if you have a $100,000 life insurance policy, and you purchase an additional $30,000 worth of insurance by paying a lump sum of $10,000. The lump sum of $10,000 includes all fees and expenses required to cover the additional $30,000 worth of death benefit.
The policyholder is not required to pay anything in addition to the lump sum because the coverage has been paid in full, or “paid up.”
For most policyholders they may actually still be paying premiums on the original policy, but they may suddenly have a need to add coverage (perhaps they had another child and want to add to the death benefit, for example).
The paid up addition rider allows the policyholder to add coverage to an existing policy without having to prove insurability, which means there are no health questions or life insurance medical blood testing required.
For this reason, (no evidence of insurability required), life insurance companies insulate themselves with caps that limit the amount of paid-up additions a policyholder can buy at any particular time.
You see, an insurance company is protecting itself with these caps from a policyowner who is terminally ill trying to get as much death benefit as possible through the use of paid-up additions.
If you’re in the market looking for life insurance make sure you talk to a professional about the paid up additions rider. It may just be your ticket to the fast track of building cash value in your policy.
We’d love to help if we can, so please give us a call for a complimentary strategy session.