Paid Up Additions: The Magic of Cash Value Life Insurance

It makes perfect sense to dedicate some time to the discussion of paid-up additions and their role in cash value life insurance. You’ll find them under a few different names (additional insurance rider, enricher rider, enhanced paid-up additions, etc.), but it all means the same thing.

This feature of a whole life insurance policy is critical for creating a cash-rich policy, and we’ll take some time to explore what paid-up additions are, how they function inside a policy, and, most importantly, why you want them.

paid up additions

To begin, paid-up additions are immediately paid-up miniature life insurance policies. They have a cash value equal to the amount of the incoming money (e.g., if you put in a dollar, the paid-up additions cash surrender value is immediately one dollar, minus a load fee where applicable).

Every insurance company assesses a load fee against paid-up additions (and this amount varies widely), so the cash surrender value will reflect this deducted amount.

Also, because paid-up additions are an immediately paid-up insurance policy, they come with a death benefit that is a multiple of the incoming money (e.g., $1 in yields $5 in death benefit), and these miniature policies are participating whole life insurance, meaning they earn dividends.

Keep in mind that mutual insurance company ownership is vested in policy holders, so the more death benefit, the greater the ownership.

Dividend Option

Typically, the default dividend option on a policy is to use the cash to purchase paid-up additions, and this use has a compounding effect (for the mutual fund savvy among us, think reinvested dividends).

So, the cash paid from the dividend purchases paid-up additions, which earn additional dividends, which also go towards purchasing more paid-up additions, which earn even more dividends, which purchase more paid-up additions, which…well, you get the idea.

Paid Up Additions Rider

The dividend option alone can be pretty powerful, but the most enriching use of paid-up additions is through a rider that enables the policy owner to place his or her own money into the policy to purchase paid-up additions.

It’s like making an extra deposit of money (but, for the sake of not being sued or censured by the state insurance department, please understand that it’s not a deposit; we’re happy to clarify this point – just contact us).

More Cash

Because they are immediately paid up and begin earning dividends right away, paid-up additions will grow cash surrender value faster than a policy without a rider with which the policyholder adds money.

For this reason, using paid-up additions to yield better returns on one’s life policy is a common practice.

It’s also safe to say that the more money you put towards your policy that goes to paid-up additions, the more money you’ll have in the policy (probably), and the better your overall internal rate of return will be.

As you know by now, we’re not big fans of general rules of thumb and suggest you always take time to review your proposals.

Just let us know if you need some help with that.


7 Responses to “Paid Up Additions: The Magic of Cash Value Life Insurance”

  1. […] in the week we declared PUA’s the magic behind Cash Value life insurance.  If PUA’s are the magic, dividends are the mana that grant them their […]

  2. […] anytime for any reason.  Sure not everything you pay in base premium is available immediately, but PUA’s are.  The idea that putting money into whole life insurance locks it up for half an eternity is […]

  3. […] is (also by insurance definition) a Modified Endowment Contract (MEC).  It functions a lot like a Paid-Up Addition (PUA), and you don’t need to spend much time around here to know that we’re huge fans of […]

  4. […] That’s the question blending answers.  As we’ve already stated, blending is simply adding more death benefit to the policy in the form of term insurance (really cheap term insurance) so we can place more cash into the policy.  What’s happening is, you’re setting the policy up with an extra term death benefit that one day will either be replaced with death benefit created by the extra cash you place into the policy, or surrendered.  But this extra term death benefit increases the MEC threshold to allow for more money to enter the contract.  And all of that extra money is that goes in, goes in as that super charger of a whole life contract we refer to as a Paid-up Addition. […]

  5. […] to fake, this is why grilling your agent is crucial.  If you’re looking for a good topic, Paid-up Additions are a great topic.  I’m going to say something for which every agent out there is going to […]

  6. Justin Bilyj says:

    This has to be one of the best life insurance blogs I have read.
    The style is extremely readable and understandable.
    Each blog post gives just enough to understand one of many cogs of life insurance.
    I look forward to reading the rest of the posts!
    (non-affiliated)

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