What Is Reduced Paid-Up Insurance?

Whole-life policyholders may have the choice to use the cash worth of their policy to pay the entire premium in one lump sum. This is known as reduced paid-up insurance. They can then stop making premium payments.

Even though skipping payments can save money, using insurance with a lower paid-up balance has significant drawbacks. Let’s find out more about this insurance’s definition, operation, and advantages and disadvantages to be aware of.

Definition and Examples of Reduced Paid-Up Insurance

One of the choices for payout in a life insurance nonforfeiture clause is reduced paid-up insurance. It occurs when you use the accumulated cash value of your whole life insurance policy to pay for a new life insurance policy with a lower face value.

Choose the option that best suits your needs. How much insurance you can purchase for your cash value will depend on your insurance agent.

You no longer need to make payments on your previous insurance because you can buy a new one with just one premium payment, and your coverage is assured for life. You can do this to save money each month.

However, because the face value of your new policy is lower, your beneficiary will get less money when you pass away The amount of insurance you’re able to purchase with your reduced paid-up option depends on two factors:

  • Your current age
  • The original policy’s cash surrender value

The lower paid-up insurance policy you buy has the same terms and conditions as your previous one, regardless of the modified face value. As a whole life insurance policy, it also keeps building cash worth throughout the course of your life as interest or dividends are paid.

How Reduced Paid-Up Insurance Works 

Consider the case where you already hold a whole life of permanent insurance coverage. You’ve been paying for a long time. Then, after creating a new budget after retiring, you decide you no longer want to make consistent premium payments. (Generally, there are no fees or restrictions if you choose to surrender your policy or employ a non-forfeiture alternative.)

You determine that the lower paid-up insurance option would best suit your needs after examining the three types of payouts. Your insurance agent looks over the specifics of your policy to determine your current face value and the total amount of cash value you’ve built up over time. Your total monetary value is calculated to be $13,005.

This cash value, which they calculate after taking your age into account, can be used to purchase paid-up insurance with a death benefit of $30,990. You complete the paperwork to request the adjustment because you believe the benefit will meet your needs.

As it accrues interest, this policy would continue to increase in cash value. You wouldn’t have to pay premiums any longer because it has been fully paid. Your beneficiary would get the face value after your passing.

Pros and Cons of Reduced Paid-Up Insurance 

Pros Explained
  • No monthly payment: You’re using your cash value to buy a policy with a lump-sum payment. You won’t have monthly premiums to pay.
  • Beneficiaries still receive a death benefit: The benefit may be reduced, but you can still have peace of mind that loved ones will get some money when you die.
  • The policy continues to build cash value: Once you’ve purchased the replacement policy, it works exactly like your original policy. It can build cash value with interest. You can use that cash value for other financial reasons, like taking out a loan.

Cons Explained

  • Riders drop off of policy: Once you take a nonforfeiture option, all riders drop off your policy, including accidental death.
  • May have time limitations in place to avoid fees: Some life insurance policies have a surrender charge period in place. If you give up your policy before then, you’d have to pay a fee. Others may have rules in place that prevent you from making this type of change for a few years. Check your policy for any restrictions.
  • The beneficiary receives less when you die: You’re buying a policy with a smaller face value. This means your beneficiary isn’t going to get as large as a death benefit when you die.

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