Paid-up Additions are a crucial component to whole life insurance when someone wants to focus on cash value accumulation. In fact, we declared the rider–the magic of cash value life insurance a long time ago.
But we’ve tended to be real loosey-goosey about a very important distinction between paid-up additions, which was entirely by accident. And today I’m going to try to further solidify precisely what we look at when it comes to sorting out coveted policy features specifically regarding whole life insurance as those features pertain to life insurance as a low risk asset class.
To date, we’ve highlighted the notion that paid-up additions will dramatically improve the cash value performance of a whole life insurance policy—super charge it even, as some others may suggest. And while we’ve spent a lot of time talking about how one goes about maximizing the amount of paid-up additions that go into a policy, we’ve spent no time discussing what type of paid-up additions one would want to use for this goal.
That’s right I didn’t make a typo—at least not in the last sentence of the above paragraph—there is more than one type of paid-up additions riders. There are generally two:
The names are somewhat straight-forward and self explanatory, but let’s spend a minute or two on specifics to ensure understanding.
Level paid-up additions riders are a set amount of paid-up additions one will purchase on a policy each and every single year. The amount does not vary. It can, theoretically, be adjusted down if the policyholder wishes, but not up.
Flexible paid-up additions riders are an amount of paid-up additions that can be purchased within a certain range. The amount is not fixed and can be increased or decreased within a specified range (specified at policy issue) at the policy holder’s discretion.
It’s probably pretty self-evident, but again to ensure clarity, the flexible paid-up additions rider is much more useful from a life insurance as an asset class approach since it allows funding flexibility.
There are two important reasons:
It’s sometimes (most of the time) a bad idea to assume that just because one has a paid-up additions rider, one has a policy or is considering a policy, that is optimally designed. We’ve also run into a few situations where certain companies and or their agents (names have been removed to protect the not so innocent) have suggested something to the effect of “see there’s the paid-up additions rider, we’re good now so let’s move forward.”
Some carriers have a very half-hearted approach to paid-up additions (it’s one of the chief reasons some names were left off the top whole life carriers for cash value list). If a flexible rider is available, it’s certainly the one you’ll want in most circumstances, and if it’s not, you may want to consider products from carriers with more funding flexibility.
There are those who would have you believe that whole life insurance is a stodgy and rigid financial product that requires you to commit to the premium. In fact, one of the biggest listed drawbacks to the product when it comes to using it for cash value accumulation is the notion that the large premium you’re looking at is a constant commitment that requires many years of funding or else you'll be forced to forfeit your policy.
Not true…sort of. We covered this a few weeks ago.
A flexible paid-up additions rider can give you considerable funding flexibility to decrease or increase your annual outlay as your finances allow. As we covered above, the flexible paid-up additions rider will allow you to increase or decrease the amount of the rider (i.e. the amount of money going into the policy through this rider) within a specified range.
I’d give you more details specifically on the specified range, but the truth is, this varies quite a bit by company with some being much more liberal about the range than others.
Good question. We’d love it if they did. But I’d suggest the biggest reason behind most carriers apprehension about such a rider has to do with the amount of outstanding death benefit it creates. Remember, all paid-up additions are technically mini immediately paid-up policies meaning they come with a death benefit that is a multiple of the money going into the rider (e.g. put $1 in get $3 in death benefit).
While we may not care a whole lot about this extra death benefit when we design policies specifically for cash value accumulation, I can assure you that the life insurer definitely does worry about the amount of death benefit that is being created by the paid-up additions rider, as it places additional risk on the insurer.
This is also why no paid-up additions rider gives anyone an unlimited funding amount. To do so would place a limitless guaranteed increase option on the policy, and anyone with a terminal illness would reasonably place all of the money he or she could muster up into the policy.
One of the chief reasons we like life insurance as a means to build a stronger financial position is the flexibility it brings to the table regarding options you have available. Need to pull cash for an emergency, done. Found a once-in-a-lifetime investment opportunity and need some capital, the check is in the mail. And all of this can be done with minimal impact on the policy’s long-term performance.
On the subject of flexibility, the funding of one’s policy should be no different. Whole life insurance does not need to be the commitment others have suggested it is. And we can certainly design whole life insurance to accommodate varying cash flows, provided we are employing the correct paid-up additions riders for the intended job.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.