Paid-up additions are a key component in the design of high cash value participating whole life policies, also known as IBC Banking policies, and directly responsible for the growth of the cash value.
In this blog we are going to concentrate in the definition of paid-up additions and in future blogs we will be going deeper into the types of paid-up additions riders and how to use them to maximize the cash values of your whole life policies.
Paid-up additions are mini paid-up whole life policies that attach to your base whole life policy. They have a death benefit and a cash value and as its name implies, they require just one single premium payment and they are forever paid-up. In other words, you keep the death benefit of the paid-up additions and its cash value without ever paying any additional premiums.
The term paid-up additions refer to both, an elective rider or riders and a dividend option. In fact, you can elect to add paid-up additions to your policy through a rider or riders and you can instruct the insurance company to use its dividend payments to purchase paid-up additions for your policy.
The death benefit of a mini paid-up whole life policy is a multiple of the premium paid to purchase the paid-up addition. For example, if one dollar is paid to purchase the paid-up addition, its death benefit is permanently increased by four or five dollars. In fact, the actual amount of death benefit purchased by a dollar depends on several factors, like the age, the gender, and the health of the insured. For a dollar of paid-up additions purchased, a younger and healthier insured obtains more dollars of death benefit than an older or less healthy insured. This death benefit stacks on top of the base whole life policy and it explains why many whole life insurance illustrations appear to have a death benefit that keeps growing over time. Remember paid-up additions, either through a rider or through dividend purchases create the additional death benefit.
You should understand clearly that the death benefit of a specific paid-up additions does not grow over time, but the continuous purchasing of paid-up additions causes an outstanding increase in the overall death benefit attached to the base whole life policy.
As previously mentioned, paid-up additions purchased through a rider also have a cash value which is equal to the premium paid minus a load fee. This is a one-time fee assessed against the paid-up additions. This fee varies among life insurance companies and the current range is between 5% and 10%. What this means is that if the load fee is 5%, for every dollar you use to purchase paid-up additions, 5 cents go to the insurance company and 95 cents go to the cash value of the paid-up additions. A higher load fee does not always mean less benefit to the policy owner and vice-versa. Life insurance illustrations include these fees in their projections. These illustrations allow you to determine the effect of a higher load fee on cash values. The cash value created by paid-up additions accumulates over time at the guaranteed interest rate paid on the base whole life insurance policy.
Since paid-up additions are themselves mini whole life policies, they can also earn dividends just like a normal whole life policy. This creates a tremendous opportunity for compounding cash value and death benefit. It is very common for policy owners to use the dividends earned on both the base whole life policy and the paid-up additions to purchase additional paid-up additions.
Using dividends earned on paid-up additions to purchase more paid-up additions creates a larger amount of paid-up additions outstanding on the base whole life policy. This, in turn, creates an ever-larger dividend earned year-over-year, which then buys more paid-up additions. These additional paid-up additions then earn even more dividends, which can then purchase even more paid-up additions. Therefore, using paid-up additions and dividends in this manner creates an exponential growth curve in both cash value and death benefit outstanding.
While paid-up additions are mini paid-up whole life policies, it is critical to understand their attachment to the main base whole life insurance policy. It is possible to detach the paid-up addition from a main base whole life policy if you wish to surrender the paid-up addition for its cash value. The original base whole life policy and all other paid-up additions remain in place unaffected by this action. However, it is impossible to surrender the main base whole life policy and keep the outstanding paid-up additions in place.
Keep the following thought in mind. While you are free to cancel any amount of paid-up additions you wish, the main base whole life policy will remain in place and unaffected by cancelling paid-up additions. On the other hand, if you wish to cancel the main base whole life insurance policy, you must also cancel all of the outstanding paid-up additions purchased as a result of this main base whole life policy. In other words, it is not possible to cancel a main base whole life policy and keep the paid-up additions in place that you purchased while the base whole life policy was in force. You can, however, make changes to the base whole life policy and keep the paid-up additions in place unaffected by the change. The crucially important action is that the original base whole life policy must remain in force.
Look out for our next blogs 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