Paid-Up Life Insurance
“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.
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