Paid Up Additions: The Magic of Cash Value Life Insurance

paid up additions add fuel to whole life insurance

The paid up additions feature of a whole life insurance policy is one of the most powerful components with respect to cash value accumulation.  Most whole life products have a paid up additions (PUA) feature, but they can all work a little differently so it's important to note that one company's approach could vary substantially from others.

But before we explain how they work…

What Are Paid Up Additions?

Paid up additions are available through a rider that is added to a whole life insurance policy. The PUA rider allows the policy owner to purchase additional paid-up insurance on their policy. That all sounds very technical, so let's explore what that actually means for you if you're looking at cash value life insurance (whole life in particular) and trying to decide if it's the right fit.

The PUA rider is the mechanism used to place additional money into a participating whole life insurance policy to increase policy cash value performance. Every dollar of premium that is allocated to the paid up additions rider creates a small paid up insurance policy that has its very own cash value that is created immediately. In general, whole life insurance policies that have a substantial portion of the total premium allocated to paid up additions will outperform those that do not take advantage of PUAs.

There are also various paid-up additions options available from each insurance company. It may all seem complicated but hang in there, we're gonna explain it in multiple ways and provide examples to illustrate how it works.  We want to help everyone understand paid-up additions and their application to life insurance policies.

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What Is Universal Life Insurance & How Does It Work?

The Basics of Life Insurance Part III Universal Life Insurance

Prior to booming interest rates from the later '70s and early '80s, your life insurance options were pretty much term insurance and whole life insurance (and these nifty things calls endowment contracts that have since gone the way of the dodo).  But, as interest rates started to skyrocket and insurance companies appeared to lag way behind, many began tough criticisms of the industry for offering such tiny returns compared to CD's and other interest-based savings vehicles.

The industry maintained that its payment of dividends accounted for the fact that policy loans did not change the dividend paid (essentially taking money out without taking money out) and required a smaller dividend payment.  Still, the spread was pretty great and a lot of people began taking large policy loans and placing the money into other savings vehicles with much better returns in the short run.

Some companies tried to combat the interest rate environment by changing the way in which they paid dividends.  The Guardian Life Insurance Company of America was instrumental in changing the payment of dividends by pioneering what is now known as Direct-Recognition to compensate for the interest spread.

They paid a higher dividend rate by addressing what all of the insurance companies were fearing, money leaving the contracts.  So, Guardian began a practice of paying higher dividends if the money stayed in the contract, and reduced the dividend on loaned values of the policy.

Others in the industry decided to go in a different direction.  Instead of changing up dividend treatment, they decided to create a new product.  A product that took the guarantees that Whole Life brought off the table, but allowed for an opportunity to make more money on the cash value in the policy if interest rates continued their rally.  This new product was called Universal Life Insurance

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What Is Whole Life Insurance & How Does It Work?

The Basics of Life Insurance Part II

Known by a few different names, and probably the most tweaked product in the industry, Whole Life (aka straight life in older circles) has a several centuries history of offering guaranteed death benefit for the entire lifetime of the insured.

In the world of guarantees, nothing beats it, and it has been an anchor for conservative savings plans for just about as long as it's been in existence.  It's also one of the most hotly debated products in the insurance industry as opinions run wild about its overall usefulness compared to other products that exist today. 

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