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 and how they function inside a policy and most importantly, why you want them.
To begin paid up additions are an immediately paid up miniature life insurance policy. They have a cash value equal to the amount of the incoming money (e.g. you put in a dollar, and the paid up additions cash surrender value is one dollar immediately, 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, mutual insurance company ownership is vested in policy holders, so the more death benefit, the greater the ownership.
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 (more dividends) which also go towards purchasing more paid up additions, which earn dividends (and now even more dividends) which purchase more paid up additions, which earn (you get it by now) and so on and so forth.
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).
Because they are immediately paid up and begin earning dividends immediately, paid up additions will grow cash surrender value faster versus a policy that does not include a rider where the policy holder is adding money through this mechanism. For this reason, using paid up additions to yield a better return on your 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, and (probably) the better you’re overall internal rate of return will be. Since, we’re not big fans of general rules of thumb. We’d suggest always taking time to review proposals.
There you have it, the basic skinny on paid up additions, the so-called supercharger of whole life insurance plans.