Before you can take the advantage of paid up life insurance policy cash value, you need to understand what a life insurance is, what does it mean when it is paid up, and the cash value of a policy. For those who are unfamiliar with insurance matter or process, things may seem a bit tricky or complicated. But in reality, it’s not. As long as you understand the basic concept, you should be fine. Plus, you will find out how insurance works and what benefits can you get from it. If the benefits aren’t beneficial for you, at least they can be useful for your family.
Life Insurance and Paid up Meaning
Not everyone understands about how a life insurance works, or the fact that it can be paid up. Thus, resulting to many of them not familiar with paid up life insurance policy cash value or such things alike. There are some common questions related to the paid up policy, such as what does it mean when an insurance policy is said to be paid up? Does a paid up policy can apply to anyone? How do you know if your policy comes with such a paid up option? Does the paid up policy have extra benefits?
If you know the basic answers to these questions, you can make a better and sounder financial decisions related to you (and your family’s) future financial condition. That’s why it would be wise if you can learn a few things about insurance’s basic and function so you can make a more educated decision.
Basically, the name of the policy has described its function and use. Paid up life insurance is a (life) insurance policy that is fully paid so you won’t have to pay for the premiums anymore, and the insurance remains in force. Don’t be fooled by the seemingly simple concept, because it’s a bit complex than that. You need to know that paid up life insurance is only available for whole life insurance policies. Does it mean the term life insurance policy doesn’t have such a paid up option? No, it doesn’t. The paid up concept is only applicable strictly to the whole life policies.
What is Whole Life Insurance?
This insurance coverage would cover the insured individual’s whole life. It means that she/he will be financially protected, provided they always pay the premiums on time – and they have never stopped making the payment. The premiums are basically level or stable, which means that the amount of money you pay will remain the same for your entire lifetime. That’s why, having such an insurance would be highly profitable if you have started from the young age. If you start having the insurance in your 20s, the financial benefits would be abundant.
As long as you always pay the premiums, the death benefits (for your beneficiary) are solidly guaranteed. In this way, your family won’t have to deal with financial hardship or burden when you are gone. They won’t have to go through any financial ‘chaos’ or downfall after dealing with emotional loss of losing you. The whole life insurance policy is meant to help families cope with the loss of their loved ones while still supporting them with solid financial standing.
Whole life policies build the so-called cash value up, and this cash value is tax free. Consider this cash value as savings, and it is created over the life insurance policy. This is the basic of paid up life insurance policy cash value. The cash value will grow continuously as time goes pay, along with the premiums. If you give up paying the premiums earlier, you are still entitled to the cash value
There is another alternative to this, and it is called the dividend paying or participating whole life policy. In this case, your insurance providers are required to pay dividends to you as long as you always pay the premiums on time. Dividends are basically life insurance’s profits that must be paid by the insurance companies to the policy holders who invest their money in life insurance. Now, do you get the idea and the concept? This leads to paid up life insurance policy cash value.
With the paid up life insurance, there are two options available:
- Paid up status. You should have no issue converting whole life policy to the paid up policy. It enables you to keep your policy remains in force, and yet, you won’t have to pay the premiums all the times. It means that your beneficiary will get your death benefit’s portion if you pass away without you having to continue paying for the premiums.
- Paid up additions. You can use the dividends from your policy to buy extra coverage. It helps you grow extra cash value.
Remember, paid up life insurance policy cash value is only possible with whole life policy. If you do have one, you can consider about converting it to the paid up status easily, but it depends to your personal preference, and whether you find it suitable for your condition or not.
How to Convert the Whole Life Insurance
People mostly buy the whole life insurance with the best purpose and intentions. However, premiums can be a burden overtime and people may struggle when they have to pay the premiums. It’s also possible that these people find out that their policy is no longer beneficial. But even if you think that your policy isn’t a beneficial investment anymore, you shouldn’t let the policy lapse. It’s never a good idea or a wise move. Think about all those years spent with you paying up the premiums, accruing cash value. This is usually the time when people start wondering if there is a way for them to keep the policy, keep it stay in force, and they won’t have to continue paying for the premiums.
The paid up life insurance policy cash value can be an option, but only if you have a policy that allows you to convert to the paid up status. But you need to remember that you still need to pay the policy so it remains in force. This is possible if you convert to the paid up policy, but only if you yourself have built substantial cash value in the policy. It means that your value remains in force, and the premium is still ‘paid’ from your cash value. But if you use your cash value this way, don’t be surprised if your death benefit decreases. If you die, your beneficiary will still get the death benefit, but the amount would be the ones left after the premiums paid.
In short, whenever you decide to use the cash value (whether to take a loan out or as a mean to pay your premium or even surrender the policy), it will reduce the amount of your death benefits. The more you take, the more funds being reduced.
The Paid up Addition
What about paid up addition? It’s completely different from paid up life insurance policy cash value. The paid up addition is the ‘miniature’ version of the life insurance policy. Cash value would be set through the amount being paid. It means that when you pay $10, you also accrue $10 for the cash value. The paid up addition offers a death benefit. It also gets interest or dividends (from the insurance provider), just like the life insurance policy. The interest or dividends would be put to the cash value.
These mini policies are basically paid up, meaning that they don’t need premiums or other costs. You should be able to accumulate cash value gradually, and your beneficiary can still get the death benefit if you pass away. Basically, having the paid up additions can function as good investment. It’s a good decision that will secure your finance safely, especially for those who want to find tax-friendly and safe growth.
How to Use the Cash Value
You have learned that cash value has its own benefits and usages. There are four ways on how you can access the cash value.
- You Use It to Pay the Premiums
This is what we have discussed earlier; using your cash value to fund your paid up insurance premiums. This paid up life insurance policy cash value can help you cover your life insurance premiums without you having to constantly pay for them. Whenever you use the cash value, it would affect your death benefits, which mean that your beneficiary won’t get the full amount of that benefit.
- You Take a Loan out
People can borrow money up to their policy’s cash value. Since this kind of loan isn’t considered an income, it is tax free. However, never forget that borrowing money from your cash value would reduce the death benefit, unless you pay up your loan. If you pass away before repaying that loan, the outstanding amount would be subtracted from the death benefit. If you pay the loan on time, your death benefit won’t be reduced.
- You Make a Withdrawal
You can always access your cash value freely, and it’s generally tax free. But if you take more amount that the one that you have put into the cash value, your withdrawal would be taxed because it is considered as an income. You should also remember that taking your cash value would reduce your death benefit (for your beneficiary). Let’s say that you have cash value of $50,000 in your funds, so when you withdraw $75,000, it would be taxed. But if you only withdraw $45,000, it won’t be taxed. Moreover, your cash value is $50,000 and your death benefit is $250,000. If you take the $50,000, your beneficiary would get the death benefit of ‘only’ $200,000.
- You Surrender Your Policy
Surrendering the policy means that you cancel that policy. It also means that you won’t be covered by the life insurance anymore. If you surrender the life policy, you can still get your equity (it is the amount that you have paid to your cash value, plus with accrued interest). But your beneficiary won’t be able to get the death benefit. Plus, not only you will have to deal with extra surrender fees, it’s possible that your insurance provider subtracts your equity with any unpaid premiums or loans that you have on your policy. And it’s also possible that you will have to deal with income tax when getting the equity because it would be considered as an income.
The paid up insurance policy cash value may be ideal for some people, but it doesn’t mean that it would work out perfectly for everyone. You need to consider a lot of factors when you want to make this decision because it’s related to your own financial standing as well as your family’s financial situation. It’s crucial that you think about paid up life insurance policy cash value carefully before you make any decision.