A paid-up additions rider isn’t the first thing that comes to mind when people think of home renovations. In fact, life insurance is rarely the first thing on anyone’s mind. But a paid-up additions (PUA) rider is one of the most important elements of a properly structured life insurance policy built for cash growth. You’ll see how in a minute.
When I was a little kid, my family moved from sunny Southern California to the Pacific Northwest. We moved into a house in a suburb of Portland, Oregon. After a few years, my parents decided to add a big room onto the back of our house that significantly increased the square footage of our home. Complete with a second story loft, a pool table, wood stove, and huge windows that looked out onto the lush greenery of the Oregonian Evergreen Trees of our backyard, the room did a lot more than just increase the square footage of our home, it dramatically affected our quality of life.
For most people, financing a project like this is going to come down to two options: using cash or getting a bank loan. Let’s say, for illustration purposes, that my Dad used cash to pay for his project. If he had used cash then the new family room would have been “bought and paid for” while he continued to make payments to the bank for the rest of the house. Even though we could live in the house while payments were made, the majority of the cost for the house was yet to be paid. In contrast, the family room was paid for just once, and it would provide benefits to the family for decades, while increasing the value of the entire house during the process.
Benefits of a Paid-Up Additions Rider
With our analogy firmly in place, think about paid-up additions as paid-for insurance. Every dollar you pay into the PUA rider buys an additional amount of death benefit that is completely paid for. It is an extra amount of death benefit coverage that is added as a rider to a policy before the contract is issued. Unlike the rest of the life insurance policy (the base policy) that is paid for over time, the paid-up additions portion is paid for only once. The client is guaranteed (at least) that death benefit for the rest of the contract without paying any more for it, so long as long as any required base premium is paid. The PUA rider is a crucial component to a properly structured life insurance contract. For every dollar that is paid into the PUA rider, a larger amount of death benefit is created.
When the PUA rider premium is paid, the majority of the premium creates liquid cash inside of the policy that the policy owner has complete (contractual) control over. Since the insurance company has collected the entire sum of money for the associated death benefit up-front, they are no longer “on the hook” if the insured dies prematurely. The coverage was already paid for. Therefore, the insurance company passes a percentage of the PUA premium to the client’s policy. While the PUA premium creates immediate cash value, the base premium also creates cash value. In my personal policies, over 100% of my annual premium payment comes back to me in the form of cash value. Needless to say, I am very excited to make my premium payments each year!
To conclude: The paid-up additions rider increases the room that a life insurance policy has to hold cash. What if I could go back in time and teach my parents what I know now about life insurance? What if I could show my Dad how to create a pool of money that was completely under his control? By paying money into the PUA rider of a life insurance policy, we could have financed our home renovation project from our own “bank” rather than having to rely on others, while still maintaining ALL of the other benefits of owning a life insurance policy!
At Paradigm Life we can customize a policy to fit your financial situation. Our expert Wealth Strategists are available to answer your questions and show you customized illustrations, outlining an individual plan of action to help you achieve your goals.
Discuss these topics with your Wealth Strategist: What are the differences between cash and bank financing. Why is it important for you to learn about paid-up additions now? What type of flexibility does the PUA rider provide? What are the differences between the annual and single PUA rider? How can you create immediate financing capital by making PUA payments through your life insurance policy?
– Michael Bonny