What is Paid-up Life Insurance?
Paid-up life insurance is a policy that can be maintained without the policy owner needing to make future premium payments. There are several different types of paid-up life insurance, and each comes with unique considerations.
Life insurance with a paid-up status
Once a life insurance company deems a policy paid-up, it indicates that the policy owner no longer needs to make premium payments in order to keep that coverage in force.
A single-premium life insurance policy would technically be a paid-up policy, for example, because the policy owner paid in full with that single, lump-sum premium.
You’re more likely to hear paid-up life insurance in regards to certain whole life insurance policies, though. Some whole life insurance allows the policy owner to convert the policy to paid-up status once their policy’s cash value has accrued to a sufficient level.
At that point, the insurance company will pull from the amount of cash value that has accrued within the policy to pay for the premiums the policy owner would have otherwise paid. Moving forward, you’re not responsible for paying anything else to keep your policy active.
But here’s the catch. Your death benefit gets reduced proportionally to the amount of cash value used to cover your premiums. That means that the longer you live after converting your coverage to a paid-up policy, the smaller the death benefit will be when you pass away.
Fortunately, you may see some cash value growth to offset the premium payment draws. Beyond the stipulated cash value growth outlined by your whole life policy terms, if you have a participating life insurance policy, your dividends can be applied to your cash value to help cover premium payments and preserve your death benefit.
Even though a paid-up whole life insurance policy comes with a death benefit that generally shrinks over time, it still may be a good option if your insurance needs have decreased (e.g., you paid off your mortgage) or you’re struggling to afford the premiums. A paid-up policy offers much greater protection for your beneficiaries than a lapsed one, which will leave them with nothing. By converting the policy to paid-up, you ensure that the premiums you have paid up to that point count for something.
Beyond converting a whole life insurance policy to paid-up status, you may have an option to explore adding paid-up coverage to your policy without affecting your death benefit.
Specifically, this applies if you have a participating (i.e., dividend-paying) policy with a rider that allows you to purchase paid-up additions. In that case, you can use dividends to purchase these paid-up additions, which give you added death benefit without the need to pay any additional premium or undergo any medical underwriting. Paid-up additions can also earn dividends and accrue cash value, compounding your benefit.
One quick note on paid-up additions: don’t expect to be able to buy the same level of coverage per dollar as you did when you initially bought your life insurance policy. As you get older, life insurance gets more expensive — and insurance companies price paid-up additions based on your age now.