A Paid-Up Additions rider is an important component of a well-designed dividend-paying whole life insurance policy focused on cash value accumulation.
So, if you want to build wealth with your whole life insurance policy, a Paid-Up Additions rider is a must.
By the end of this article, you will know what Paid-Up Additions are, how they work, how much they cost, and—most importantly—how to implement them in your life.
Paid-Up Additions Explained
Paid-Up Additions Rider (PUA or PUAR) is a small part of whole life insurance, paid with one single premium, and stacked onto a traditional whole life policy.
So, why are they necessary to build wealth using our whole life policy?
Paid-Up Additions are the most efficient way of increasing cash value.
Let’s break this down a little bit further.
Paid-up additions are easiest to understand if you think of them as small policies that require only one payment. They are immediately “fully paid up.”
Regularly purchasing Paid-Up Additions significantly accelerates the growth of your policy. Paid-up additions are just that, paid up. This means that, unlike your base policy, you don’t have to pay premiums on them once purchased.
And here’s the cherry on top: Paid-up additions feature can actually generate dividends on their own. This means that their value will increase over time.
Besides PUAR, there are 12 different riders you can add to your whole life policy, including the Return of Premium Rider, Child-Term Rider, Guaranteed Insurability Rider, Family Income Benefit Rider, and others, depending on your goals.
How Do Paid-Up Additions Riders Work?
Paid-Up Additions work just like a regular whole life insurance policy. It means each PUA has its own cash value and death benefit component. But there is a difference too.
PUAs are paid up fully with one single premium, so their cash value accelerates toward critical value much sooner than a whole life policy’s cash value. A PUA’s cash value must increase daily to reach parity by age 121, just like it would with any whole life.
By utilizing a PUA rider, a policyholder can constantly add coverage and cash value to their policy. And the best part?
Policyholders can do so without going through medical underwriting. It is a huge advantage since most people develop health issues as they get older. And as you know, poor health means higher premiums.
Speaking of advantages, let’s see what else we get with PUAs.
What Are the Benefits Of Paid-Up Additions?
Growth in Cash Value Is Accelerating Quickly
The main benefit of buying PUAs is a rapid acceleration of cash value growth inside a traditional whole life policy. At the same time, it is why we want to buy them, right?
With a regular whole life insurance policy, it usually takes between 12 and 14 years to break even. Due to this fact, many people don’t believe it’s possible to generate wealth. But that’s why we teach having a well-structured whole-life policy with a Paid-Up Additions rider.
When you add the Paid-Up Additions rider and fund it to the maximum, you will cut this breakeven period in half or sooner because more than 90% of your PUA premium goes to your whole life policy’s cash value.
Even though it is the main benefit of Paid-Up Additions, it’s far from the only one.
PUAs Allow You to Access Your Cash Value Immediately
Many people wonder how much it will take to build a cash value that they can use. The truth is that it can take years without a Paid-Up Additions rider. But if you add PUAs to your whole life policy, you can access the cash value immediately.
Did you know that you can use your policy’s cash value to take Lifestyle Banking into your own hands? If not, make sure to stay till the end of this article because we will show you how.
Increased Death Benefit
When people buy life insurance just for insurance coverage, it is most commonly because they want to ensure the death benefit for their loved ones. But when people buy life insurance policies to use as investment vehicles, they often don’t recognize the importance of the death benefit.
And it’s not their fault. Usually, insurance agents don’t explain it.
The total of your policy’s permanent death benefit and cash value will determine how much whole-life dividends you get. So the death benefit is far from an ancillary feature. It can make a significant difference in your earned dividends.
Here is an explanation of how the death benefit plays such an important role:
Since each Paid-Up Addition buys a paid-up life insurance policy, these small paid-up policies keep adding up, meaning your guaranteed cash value must reach a higher target death benefit. As a result, these Paid-Up Additions will increase your share of any future dividend pools declared by your insurance company.
A friendly reminder: This will only work if you buy your whole life insurance policy from the mutual insurance company. Otherwise, you won’t have the opportunity to earn dividends. If this is one of your goals, you can start working with us to create a properly structured and customized policy that will work for you.
#1 Pro tip: Use those additional dividends to buy even more Paid-Up Additions. This way, the cash value and paid-up life insurance of your whole life policy will keep increasing.
Moreover, that will cause an increase in your share of the next declared dividend pool, and so on. Repeating this cycle will create an exponential compounding effect, especially when you maximize your Paid-Up Addition payments.
Paid-Up Additions Costs
The price of Paid-Up Additions will depend on your life insurance company. Insurance companies will assess a “PUA load,” usually between 5% and 10% of the total PUA premium paid because Paid-Up Additions have no ongoing premiums.
As a result, it leaves the additional 90%–95% to grow immediately within the Paid-Up Addition’s cash value.
In the visual below, you can see how much different insurance companies charge for PUAs.
#2 Pro tip: Putting as much money as possible into your policy is a great investment, but we must warn you to put the brakes on a little. Why? Because if you put in too much money, your over-funded policy will transform into a modified endowment contract (MEC). It means you will lose some of the tax benefits of your whole life insurance.
Don’t worry; there is a way to prevent that from happening. If you pay attention to letters from your insurance company, you can keep your policy from becoming a MEC. Your insurance company will give you plenty of time to fix the problem and keep your policy from becoming a MEC.
EMBED: Infinite Banking: What is a Modified Endowment Contract (MEC)?
How Much Paid-Up Insurance and Cash Value Will You Get?
These three factors will determine how much paid-up insurance you will get from purchasing a PUAR:
- Your age;
- Your health results from a medical exam;
- Quality of the insurance company’s base whole life insurance policy.
As you can see in this third factor—the Paid-Up Additions Rider is correlated to the base of the policy. As we already mentioned, PUAs are just like a miniature version of their underlying whole life insurance policy.
How well the Paid-Up Additions Rider performs over time correlates to how efficiently the insurance company has designed it, which is determined at the onset of the policy.
Are Paid-Up Additions Riders Taxable?
Another important question we have to unpack is how taxation works when it comes to PUAR. And we have some good news in this aspect too! Paid-Up Additions riders are not taxable.
The cash value of a PUAR grows tax-deferred, and the death benefit is tax-free because it is essentially a mini whole life insurance policy unto itself.
Since a Paid-Up Addition Rider is correlated to a base whole life policy, you will have additional capacity to pay large single premiums year after year while staying within the MEC thresholds to preserve the Roth-like tax advantages.
As taxes rise, it becomes even more important that Paid-Up Additions riders are not taxable. Even if you are in a lower average tax bracket, you pay the difference out of your income, so all investment-related income is taxed at the highest marginal rates.
When determining where you fall on this table, don’t forget to include your state income tax as well:
Examples of PUA at Different Ages
We prepared a few examples of how much paid-up additional insurance your PUAR buys you at different ages and how the cash value and death benefit grow over time.
Just like with a traditional policy, as you get older, your paid-up life insurance cost gets higher. If you want to buy the same amount of paid-up insurance as you did last year, you will notice that the single premium will be slightly higher.
But when you look at the paid-up value formula from another perspective, you can conclude that it’s better to front-load it with more premium dollars from the jump. A reason for that is because the single premium has less time to reach its final death benefit destination by age 120.
The younger you start the policy designed to allow for maximum Paid-Up Additions, the more paid-up life insurance you bolt onto your whole life policy, which will:
- Increase your guaranteed cash value growth;
- Increase your cut of future dividend pools.
That’s why it’s always more beneficial to start your life insurance journey as soon as possible.
In the table below, you can see how it looks depending on the age of the policyholder:
Pro tip #3: Don’t disqualify yourself by thinking you’re too old to start a whole life policy. As you can see from the table, the cash value for a PUA is quite robust, regardless of how old you are.
On top of that, the difference in a PUA’s immediate cash value between someone who is 35 years old and someone who is 60 is practically non-existent. So, even though it’s a suggestion to set up your policy earlier in life, it doesn’t mean you can’t do it later.
Also, when you look closely at our examples, you can see that even after 11 and 25 years, the cash value of a PUAR bought at ages 35 and 60 is surprisingly close.
What actually makes a difference is the amount of paid-up additional insurance that a Paid-Up Addition Rider buys you.
So, if you’re asking, “When is the best time to buy a whole life policy and start building cash value?” the answer is—NOW!
Examples of PUA from Different Health Ratings
People with whole life insurance policies often think they will miss out if they don’t get the highest rating from their insurance company. But let’s see the numbers and see what it actually looks like:
When we compare the PUAR performance for a policyholder who is 40 years old at Standard Preferred and Preferred Plus/Best/Elite health ratings, you can see that their fears are not realized.
People who are overweight or have high cholesterol often think it would be better to hold off on buying a policy so they have more time to fix their problems and get a better deal. However, we showed you that as long as you get a standard or better result, the difference is pretty nominal.
Another reason you don’t have to wait until your health ratings improve is that you’re getting an extra year older. Also, during the waiting period, you could lose that extra time, during which your cash value could be growing in Paid-Up Additions.
Now that you know everything about Paid-Up Additions, it’s time to learn how you can use this rider with your whole life insurance policy to build wealth.
How to Take Your Lifestyle Banking and Become Wealthy
Becoming wealthy is a process that requires two different aspects that you should be working on: learning about finances on the one hand and the psychology of money on the other.
It’s really important to combine both of these aspects to succeed. But talking about the importance of our mindset when it comes to financial well-being isn’t something we’ve been taught through the traditional educational system.
And we want to change that!
Because learning how to earn money isn’t enough if you don’t know how to use it to live your own lifestyle and avoid falling back into old financial habits.
That’s why we teach people how to take their Lifestyle Banking into their own hands.