Newland's Business Notes

Paid-Up Life Insurance

Volume 10 Issue 4 -- July/August 2006

“You mean, I do not have to pay any more life insurance premiums and I still have full coverage?”  In some cases, the answer is, “yes.”  Many individuals purchase life insurance and do not understand that with certain types of “whole life” policies it is possible to stop paying premiums without losing the basic coverage. 

Most life insurance companies do not go out of their way to inform policyholders that it may be possible to stop paying premiums.  In fact, a company may make strident efforts to deter policy owners from using paid-up insurance values in their policies. 

Let’s first discuss the basics. There are two broad types of life insurance.  One is “term life insurance” which generally provides coverage for a definite period of time, such as until a particular age, 65 for example, or for specific number of years. Upon attaining that age or at the end of that period, there is no life insurance coverage. 

The other main type is “whole life” which provides coverage throughout the life of the insured. If a whole life policy is purchased and the insured lives to be 101, the proceeds will be paid at the time of death so long as the policy is still in effect. 

The way whole life-type policies work is that as the premiums are paid, a portion of the premium increases the “cash surrender value.” This is the amount you might get if you terminated the policy and the insurance company paid you whatever cash value is left in the policy.  The cash surrender value generates earnings, which in some cases, can be used to pay the premiums. 

Consider this example — Bea Fuddled purchased a life insurance policy for her daughter when her daughter was young.  Bea is now in her seventies and her daughter is in her fifties. Over the years, Bea made premium payments as they become due. No one ever informed Bea that if she stopped making payments her daughter would have the same amount of coverage as is stated in the policy (the insured value). 

Even if a policy has been in effect for many years, some insurance companies, such as Massachusetts Mutual, may include confusing or misleading wording on a premium statement such as “This is a valuable life insurance contract. Do not let this coverage lapse.”  In other words, keep making the premium payments so the insurance company can earn more. 

It is true that if you have a whole life policy and you make premium payments every year until you die, the payout at death will be greater than it would be if you used the earnings on the cash surrender value to pay the remaining premiums. 

A policy is said to be “paid-up” when it has the ability to pay for itself. When you inform the insurance company that you think the policy is, or may be, paid up, the insurance company will tell you if there is adequate cash surrender value to do so. 

While these terms and calculations are not always easy to understand, the basic concept you should keep in mind is whether there is enough value in the policy so that anticipated earnings will pay the premiums and keep it in effect indefinitely. If the answer is yes, then the policy is paid up and it is not necessary to make future policy payments.

Some insurance representatives encourage individuals not to buy whole life insurance but instead to buy term life, which is less expensive, and then invest the difference. This is often a tempting choice.  The problem, however, is that many people forget that at the end of the term there is no coverage.  If the investments have not been regularly made there may be no investment equity.  Even worse, if investments have been made improvidently, there may be no build-up of funds to pay the expenses of the estate of the decedent.

This newsletter is not intended to supplant your life insurance agent or to provide insurance advice.  The purpose is to inform readers that it might be to their benefit to ask about the option of paid-up life insurance.

Newland & Associates does not sell life insurance and is not authorized by any insurer to provide advice to policyholders concerning their particular life insurance policy.  If you need assistance with regard to estate planning matters, Wills and similar items, contact Newland & Associates.

Copyright 2006

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

Return to Newsletter List
Return to Content Index
Home Page