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Nerdy takeaways
- Paid-up additions are extra life insurance bought with a policy’s dividends.
- They allow you to grow your policy’s death benefit without increasing your premiums.
- Whole life policies from mutual life insurance companies may be eligible.
What are paid-up additions?
Paid-up additions in life insurance are small amounts of extra coverage you can buy with your life insurance dividends.
Paid-up additions (PUAs) let you increase your policy’s death benefit, which is the payout your beneficiaries receive when you die. You can do this without raising your premiums, because your dividends pay for the coverage in full. The extra coverage can help your life insurance keep up with inflation.
How do paid-up additions work?
If you have a whole life insurance policy that pays dividends, you may have the option of purchasing paid-up additions.
You’ll need a participating life insurance policy from a mutual company to earn dividends. These companies are owned by policyholders rather than shareholders. Dividends are never guaranteed, though many mutual life insurance companies, like Northwestern Mutual and MassMutual, have a long track record of paying them out annually.
If you use policy dividends to buy paid-up additions, you won’t need to take another medical exam or go through the underwriting process again. The extra coverage you can buy is based on your age at the time the dividend is issued, and doesn’t factor in any health issues you might have developed.
Did you know...
Nerdy tip: Some whole life insurance policies contain a provision that allows the purchase of PUAs with your dividends. More often, though, you’ll need to buy a life insurance rider called a paid-up additions rider to have this option. Loading
Do paid-up additions help you pay off your policy sooner?
If you’d like to pay off your life insurance policy early, paid-up additions can be part of that picture. But unlike dividends, you can’t directly use paid-up additions to pay your premiums.
Instead, purchasing paid-up additions can add to your policy’s death benefit and grow your cash value more quickly. Once you’ve accumulated enough cash value, you can then use it to pay your policy’s premiums.
If your goal is to pay off your whole life policy quickly, consider using your dividends to reduce your premiums.
Pros and cons of paid-up additions
Using your dividends to buy paid-up additions has both benefits and drawbacks, so consider whether it’s a good fit for your financial needs.
Pros
Increases your coverage without an exam.
Helps grow cash value more quickly.
Cons
Potential tax liability if you overfund your policy.
🤓 Nerdy Tip
If you overpay or front load your life insurance premiums, the IRS could classify your policy as a modified endowment contract, or MEC. This means the IRS would tax any cash value withdrawals from the policy as income. Speak to a tax professional to better understand how to avoid this as you use paid-up additions. » MORE: Is life insurance taxable?
Alternatives to paid-up additions in life insurance
If you’re shopping for a policy and want the flexibility to increase your death benefit, there are ways to do so without a paid-up additions rider.
- A cost-of-living rider (COLA) lets you purchase extra life insurance to keep up with inflation.
- A guaranteed insurability rider gives you the option to buy additional life insurance coverage at specified times.
- A term life insurance rider allows you to add an extra amount of term insurance to a permanent policy for a certain period of time.
» MORE: Life insurance riders
Other ways to use your life insurance dividends
If you don’t want or need more coverage, you might want to use your dividends in different ways.
Receive the dividend payment as cash. You can ask your life insurer to cut you a check and use the money in whatever way you’d like.
Use it to reduce your life insurance premiums. You can pay your dividends forward and use them to reduce the cost of your premiums over the course of the year.
Pay down outstanding policy loans. If you borrowed against the cash value of your policy, you can use dividends to pay down the loan amount or the loan’s interest.
