What’s the Difference Between Life Insurance Paid-Up Additions and a Paid-Up Additions Rider?

Virtually all dividend-paying whole life insurance policies allow policy owners to leave their dividends in the policy to purchase additional coverage, called paid-up additions. Think of paid-up additions as small policies requiring only one premium. They are “fully paid-up” immediately.

In addition to leaving their dividends in their policies to purchase paid-up additions, dividend-paying whole life insurance policy owners may also be able to add a Paid-Up Additions Rider to their policies, allowing them to purchase additional paid-up additions by directing a portion of their premium directly to the purchase of paid-up additions.

When you regularly purchase paid-up additions through a Paid-Up Additions Rider, you are significantly turbo-charging your policy’s growth.

In fact, whether you purchase paid-up additions with annual dividends or through a Paid-Up Additions Rider—or both!—paid-up additions increase both your life insurance policy’s death benefit and its cash value.

And here’s the icing on the cake: Paid-up additions themselves can earn dividends. That means their value can compound over time.

My blog post about dividend-paying whole life insurance raised questions I want to answer now

Some time ago, I posted a blog with the intriguing title, “Famous People Who Use the Bank On Yourself Method.” I talked about people like J.C. Penney, John McCain, Walt Disney, and others who used the cash value of their life insurance policies to accomplish what they could not otherwise have accomplished.

In my blog post, I casually mentioned “little-known riders or options that turbo-charge the growth of the cash value in the policy.”

In the “Comments” section of the blog, someone picked up on that casual comment and asked about paid-up additions. Then someone else asked how paid-up additions differ from Paid-Up Additions Riders.

These are both very good questions!

I gave a brief answer in that blog post. The article you’re reading now is a more in-depth explanation of paid-up additions. After you’ve finished this article, you’ll know why paid-up additions are important and how you could benefit from them.

Paid-Up Additions Are the Most Efficient Way to Build Cash Value

First, it’s important to understand that paid-up additions are available only on whole life insurance policies issued as participating policies. If you own a “participating” policy, then when your insurance company pays dividends, as a policy owner you share in your insurance company’s profits.

Universal life, indexed universal life, and variable life insurance policies do not offer paid-up additions. Term policies don’t offer paid-up additions, either. Paid-up additions are a unique feature of dividend-paying whole life insurance policies.

Second, with insurance companies preferred by Bank On Yourself Authorized Advisors, no one earns a commission when you use your dividends to purchase paid-up additions. Fully 100% of your dividend goes to purchase paid-up additions for you, and you will see a dollar-for-dollar increase in your policy’s cash value.

With high cash value life insurance policies, the name of the game is cash value—money in your policy you can use for many, many reasons now, while you’re living. So when you leave your policy’s dividends in your policy to purchase paid-up additions—particularly when no commissions, taxes, or other expenses are involved—you’re making an extremely smart move that can rapidly increase your policy’s cash buildup.

Even though every penny of dividends used to purchase paid-up additions goes directly into the cash value, you beef up your death benefit, as well.

Why Do Some Insurance Companies Pay Dividends in the First Place?

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Let’s say you have a Bank On Yourself-type dividend-paying whole life insurance policy. At the end of each year, your insurance company will calculate their income from all sources and then calculate their expenses, including the death claims they paid out. If they ended the year with better results than the worst-case scenario they projected, they pay you a dividend. You share in the company’s profits. It’s that simple.

These companies frequently—if not always—end the fiscal year saying, “Yes! Things went better than we predicted!”

A participating life insurance company, acting in the best interests of its policy owners (not stockholders) operates very conservatively. Its management decides how much to charge for policy premiums based on higher-than-expected operating costs and based on lower-than-expected investment returns. In a way, they’re pessimists!

But that’s good, because this kind of conservative operation tends to eliminate much of the risk of insolvency for the company. And, of course, as a policy owner, you appreciate that. (Mays, Par vs. non-par)

Dividends are not guaranteed, but some conservatively-operated insurance companies, such as those preferred by Bank On Yourself Authorized Advisors, have a long history of paying annual dividends year after year, without interruption, for 100 years or more—even during the Great Depression and every recession in at least the last century.

Paid-Up Additions Riders—Beyond Dividend-Purchased Paid-Up Additions

If high cash value is the goal, and if buying paid-up additions is the most efficient way for you to build cash value, wouldn’t it be great if you could buy more paid-up additions than just what your dividends will purchase?

Is this possible? Yes, if your life insurance policy has a Paid-Up Additions Rider.

You typically add the Paid-Up Additions Rider when your advisor is designing your policy to fit your situation and your needs. This rider is not something you can normally add at a later date.

A Paid-Up Additions Rider lets you purchase paid-up additions in addition to the paid-up additions you can purchase each year when dividends are paid.

Paid-up additions you purchase through a Paid-Up Additions Rider typically have an immediate cash value equal to about 94-95% of the dividends used to purchase them. (This percentage varies by company.)

This means that if you buy $100 worth of paid-up additions, the cash value of those additions is $100, minus the purchase fee of about $5 or $6.

Not all Paid-Up Additions Riders are created equal

Paid-Up Additions Riders come in two flavors:

  • Level Paid-Up Additions Riders
  • Flexible Paid-Up Additions Riders

Level Paid-Up Additions Riders specify the amount of paid-up additions you will purchase each and every year. The amount doesn’t vary, although you may be able to adjust it down. But you cannot increase the amount of paid-up additions you purchase through the rider in a given year, even though you might want to.

On the other hand, flexible Paid-Up Additions Riders specify a range of paid-up additions you can purchase each year. The yearly amount is not a specific dollar amount, and you can increase or decrease your rider funding within that range year by year. (The insurance company will specify the range before they issue your policy.)

Which would be more useful to you, a level Paid-Up Additions Rider or a flexible Paid-Up Additions Rider? You’ll find that a flexible Paid-Up Additions Rider is more useful, because it lets you buy more or fewer paid-up additions each year, depending on what you feel you can afford to spend.

Bank On Yourself Authorized Advisors prefer companies that allow you to pay some or all of your Paid-Up Additions Rider premium when and how you want, and companies that allow you to make partial payments or even skip payments and make them up later, if that’s what you want to do.

In addition, some companies allow you to withdraw some or all of your paid-up additions and put them back in later. That gives you a tremendous amount of flexibility.

But be careful! Just because a policy you’re looking at has a Paid-Up Additions Rider, don’t assume that it’s a flexible rider. You should ask your advisor about the range of paid-up additions you can purchase each year with that policy. If there is no range, there may be no flexibility, and you may want to consider looking at policies from a different company.

Bank On Yourself Authorized Advisors are very particular about this. They like to give their clients the best combination of policy features and flexibility, even though this means a smaller commission for them.

Flexibility of the Paid-Up Additions Rider means flexibility of the policy as a whole

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People who don’t understand the magic of good structure of a dividend-paying whole life insurance policy may try to tell you that the whole life policy premium you’re looking at is a constant commitment that you’re going to have to be paying for the rest of your life—or you’ll be forced to forfeit your policy.

This is so wrong! First, even though your whole life insurance policy gives you lifetime coverage, some policies are fully paid for in 10 years or less. You won’t need to make any payments after the policy is fully paid for!

Second, it’s possible for your policy’s cash value to grow large enough over time that you can simply use a portion of that cash value, or future dividends, to fund your premium. That means your policy remains in full force, but you’re paying zero out of your pocket.

Third, a flexible Paid-Up Additions Rider gives you considerable funding flexibility. With a flexible rider you can pay more or less each year.

Paid-Up Additions Riders Are One Key to High Early Cash Value Life Insurance Policies

Remember that your paid-up additions are small immediately-paid-up life insurance policies that come with their own death benefit and their own cash value. And they also come with their own ability to generate their own dividends—which can be used to purchase more paid-up additions. And you will never be charged again for the paid-up additions you purchase today.

Because of all that, if you want a life insurance policy with a high early cash value, more cash value over time, and a larger death benefit in the long run, then you absolutely want a policy that allows you to purchase paid-up additions.

To learn more about the living benefits of dividend-paying, high early cash value whole life insurance policies and what these policies can do for you, get our easy-to-understand FREE report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future!

You’ll discover that a Bank On Yourself-type dividend-paying whole life insurance policy has all the features you need, in just the right proportions, to maximize the growth of your cash value with guaranteed annual increases, plus potential dividends and a Paid-Up Additions Rider.

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