In this blog we are going to cover how the paid-up additions dividend option maximizes the cash value and increases the death benefit in a whole life policy and how the paid-up additions rider reduces the natural offset of a whole life policy.
The most common dividend options for dividend-paying whole life policies are paid-up additions, paid in cash, reduce premium, and accumulate at interest.
Of the four options, paid-up additions will produce the most amount of cash value and will also increase the amount of death benefit. The reason is that you purchase paid-up additions which earn dividends which then purchase more paid-up additions resulting in a compounding effect or exponential growth in the amount of cash value as well as in the amount of death benefit. In fact, if the policy owner wishes not only to increase the cash value but also the death benefit of a whole life policy, there is no better dividend option than the paid-up additions option.
Since we always deal with Infinite Banking policies whose purpose is to maximize the cash value, we always incorporate some type of convertible term insurance rider and a paid-up additions rider or riders as part of the overall premium the policy owner will pay.
Sometimes the policy owner wishes to reduce the payment period or the amount of premium to be paid out-of-pocket. One way to accomplish these options is through a premium offset option. The offset option uses cash values in the policy to cover the premium due, so the policy owner is effectively cashing some of the policy cash value and using it to pay the premium due instead of using out-of-pocket money. While it may look that a shorter payment period guaranteed product such as a 10-pay whole life might be a better choice in the above situation, this shorter payment period guaranteed product, in general, does not perform as well in generating cash value as a longer payment period whole life product. A natural offset is simply the soonest a whole life policy projects the ability to use the offset to pay the premium in full requiring no future premium payment. The illustration software of insurance companies allows to select the following offset options: a specified age, a specified year, or a natural offset. Notice that natural offset is based on the present dividend scale. If the dividend scale goes down, the number of required premium payment years will go up and vice versa.
It is also important to notice that the use of the paid-up additions rider shorten the number of required premium payments under a natural offset. This is due to two reasons: first, the use of a paid-up additions rider increases the amount of cash value in the policy and the more cash value you have in your policy the sooner you can have a natural offset. The second reason is that the amount of premium going to the paid-up additions rider is always optional and the only amount that needs to be offset is the premium going towards the base whole life policy.
In general, the higher the amount of premium collected by the life insurance company, the more cash value and death benefit will be generated inside the whole life policy. This is because the actual cost of providing the death benefit does not vary. You can, therefore, use this concept to further maximize cash value and death benefit, by using part of the premium necessary to purchase a given traditional death benefit to purchase a paid-up additions rider and of the two policies paying exactly the same total premium, the one that split its premium between the base whole life policy and the paid-up additions rider generates substantial more cash value and death benefit.
Note: The beautiful art and science of designing high cash value Infinite Banking policies requires that the actual total premium be split into actually three components: the base whole life policy, the paid-up additions rider and a convertible term insurance rider. The convertible term insurance rider reduces the overall cost of the death benefit necessary to avoid a Modified Endowment Contract (MEC) and that saved cost can go to increase the amount going to the paid-up additions rider.
Look out for our next blog as we continue to deal with the very important concept of paid-up additions.
Remember, we are always available to advise you on the best way to utilize your IBC policy.
If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at http://InfiniteBankingSimplified.com/ or feel free to email us your questions at ContactUs@InfiniteBankingSimplified.com or call us toll-free at 1-844-443-8422.
Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners