As we mentioned in Blog 62, paid-up additions come in two forms: a dividend option and elective riders.

The Money TreeIn this blog we are going to detail the two ways you can add paid-up additions to a whole life insurance policy. We will detail how specifically you add paid-up additions and go over some of the nuances of whole life insurance that may prevent you from adding paid-up additions in particular circumstances.

To use dividends to purchase paid-up additions, you just elect the paid-up additions dividend option. If you want to be sure that your existing whole life policy is using this dividend option, you have at least three ways of verifying this: 1) look at the last policy annual statement and see what the insurance company did with the dividend, 2) call the insurance company or your financial professional and ask, and 3) look at the policy information in an online policy summary.

The other way to purchase paid-up additions is through an elective rider. You choose this rider and make payments to the rider to purchase paid-up additions with your own money. Essentially, you elect to pay the insurance company more money than it requires to provide you with a given death benefit, so that all this money (minus a load fee described in Blog 62) becomes immediate cash on which you earn guaranteed interest and dividends. If you have heard someone saying he or she is overfunding his/her policy, it simply means that he or she is purchasing paid-up additions through this elective rider.

We will next go over a few rules that life insurance companies have regarding the paid-up additions rider. Please notice that none of these rules apply to the dividend option to purchase paid-up additions.

  1. The paid-up additions rider is medically underwritten and approved.
  2. The paid-up additions rider is restricted based on the premium of the policy. All life insurance companies limit the amount of paid-up additions a policy owner can purchase in a policy-year. For example, the premium directed to purchase paid-up additions can be no more than three or five times the annual whole life premium. This limitation exists because life insurance companies need to limit the liability created by the death benefit purchased by the paid-up additions rider. Some life insurance companies restrict the lifetime contributions that you make to the paid-up addition riders for a specific whole life policy.
  3. The paid-up additions rider may be scheduled or unscheduled. Scheduled means that the life insurance company will bill you for the paid-up additions rider payment when they send you a premium bill. Unscheduled means that you will not receive a bill for unscheduled paid-up additions when you receive your premium bill. Functionally, scheduled and unscheduled paid-up additions riders are identical in their costs and their generation of cash values and death benefits.
  4. The paid-up additions rider may require some payment every year. If you pay nothing towards the paid-up additions rider for an entire policy-year, the rider may terminate, and you will have to go through medical underwriting if you want to add it back to the policy if the life insurance company allows this.
  5. Scheduled and unscheduled paid-up additions riders have flexibility. Some insurance companies allow you to pay an amount of scheduled paid-up additions that is less than the amount billed. The amount of contributions to an unscheduled paid-up additions rider varies from $0 to the maximum allowed for that policy-year which is under the Modified Endowment Contract (MEC) limit.
  6. Paid-up additions riders have a load fee that we discussed in Blog 62. This fee is a one-time fee assessed against the payment when initially made. These load fees are included in any illustration that projects the values of a whole life insurance policy.

If you are purchasing a new whole life insurance policy, you add the paid-up additions rider when you apply for the policy. A well-designed policy for the purpose of generating cash values shows that the amount of premium going to the paid-up additions rider is higher than the premium going towards the base whole life policy. You can verify this by looking at the illustration and ultimately to the policy itself and analyzing the premium breakdown between the base whole life and the paid-up additions rider.

Some insurance companies may allow you to add a paid-up additions rider to an in-force policy, but you will need to go through medical and possible financial underwriting.

You can terminate a paid-up additions rider without terminating the life insurance policy and there are several situations that result in rider termination:

A time specific termination may be a specific age (e.g., age 90 or age 100) or a specific number of years after policy inception (e.g., 20 or 30 years). The later may be done by the financial professional to reduce the underwriting death benefit amount on a policy and facilitate financial underwriting.

Elective termination means that the owner stops making payments for the paid-up additions rider. This termination does not require the owner to surrender the accumulated paid-up additions. In fact, the accumulated paid-up additions will remain attached to the whole life policy, they will continue to earn dividends, and those dividends can purchase future paid-up additions. The key difference is that the policy owner can no longer electively make payments to the paid-up additions rider.

Reduced paid-up termination of a whole life policy traditionally terminates most riders attached to the policy so the owner cannot make premium payments towards the paid-up additions rider. As in the case of elective termination, the accumulated paid-up additions will remain attached to the whole life policy, they will continue to earn dividends, and those dividends can purchase future paid-up additions.

Policy termination will also terminate the paid-up additions rider and force the owner to surrender the cash in all of his/her accumulated paid-up additions.

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

We are experts in designing high cash value dividend-paying whole life policies.

Blog 63 – Everything You Ever Wanted To Know About Paid-Up Additions – Part 2