why do i want to pay up my life insurance

by Korey Schulist Published 11 months ago Updated 11 months ago

The paid-up life insurance policy enables you to keep your whole life insurance policy in force without continuing to pay premiums, but it is only an option if you have built up substantial cash value in your policy. To simplify this, it basically means that your policy is kept in force by deducting the premiums from your cash-value account.

There are lots of reasons why you may want to pay off (fully fund) your coverage: an increased or decreased need for coverage, future budgetary concerns, or the desire to build cash value faster are just a few. But as we've seen, the way to go about it can have a major impact on your level of protection.

Full Answer

Is it possible to have life insurance that is paid-up immediately?

And for good reason. Is there really a way to have life insurance coverage that is paid-up immediately? Paid-up life insurance could be described as a life insurance policy that is paid in full, remains in force, and you don’t have to pay any more premiums. But it’s not really as simple as that.

Why do life insurance premiums go up every month?

Here’s why: It costs more for the insurance company when a policyholder pays premiums monthly, because the administrative costs are higher. Like most businesses, life insurance companies also prefer to have money in hand rather than money incoming, and it’s worth it to them to incentivize you to pay upfront.

What's the best way to pay my life insurance premium?

The best way to pay your life insurance premium depends on the way you budget and pay bills. That might mean it’s easier for you to add a monthly automatic expense or it could mean that one yearly payment works better. But if you’re equally comfortable paying annually or monthly,...

Why do I need life insurance?

If you financially support a partner, children, or aging parents, you need life insurance. Anyone working a high-risk job or with extreme hobbies is likely to pay more for coverage, but those risks alone are reason enough to get life insurance.


What happens when a life insurance policy is paid-up?

A paid-up life insurance is a life insurance policy that is paid in full, remains in force, and you don't have to pay any more premiums. It stays in-force until the insured's death or if you terminate the policy. Paid-up life insurance is only an option for certain whole life insurance policies.

Why do you pay for life insurance?

Why is life insurance important? Buying life insurance protects your spouse and children from the potentially devastating financial losses that could result if something happened to you. It provides financial security, helps to pay off debts, helps to pay living expenses, and helps to pay any medical or final expenses.

Are paid-up additions a good idea?

Paid-Up Additions are a Good Idea Because They Give You a Bigger Share of any Future Dividend Pools. Part of what makes Whole Life a favorable investment is that it's the type of insurance policy that pays dividends to policyowners. This is because a mutual insurance company is owned by its policyholders.

What happens to your life insurance when the term is up?

If you outlive your term policy, your policy will end, and you will no longer have coverage. If you still want life insurance after your term policy ends, you may have the option to buy a new life insurance policy or consider a term conversion policy.

How long should you pay for life insurance?

Consider a life insurance term length of at least 30 years. If your spouse is your designated beneficiary, they would receive the death benefit if you pass away within those 30 years, and they could use the payout for the remaining mortgage payments.

Do I really need life insurance?

Although life insurance does not need to be a part of every person's estate plan, it can be useful, especially for parents of young children and those who support a spouse or a disabled adult or child. In addition to helping to support dependents, life insurance can help provide immediate cash at death.

Can you cash in a paid up policy?

When you're paid up — which means you have enough cash value to cover your life insurance premium payments — you can terminate the policy and take the cash.

Is paid up life insurance taxable?

Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.

Do paid up additions increase cash value?

The benefit of a paid-up additions rider is more cash value in your insurance policy and faster growth from dividends and guaranteed interest payments.

Do I get money back if I cancel my life insurance?

By law, if you cancel a term life insurance policy within 30 days of purchasing it, the company must refund any money you paid. In addition, if you pay some of your premiums ahead of schedule and then cancel your policy, the company should return those early pre-payments.

At what age should you stop term life insurance?

Most life insurance policies have an upper age limit for applications. Many insurers stop taking life insurance applications from shoppers who are over 75 or 80, while some have much lower age limits and a few have higher limits.

Do I get my money back if I outlive my life insurance?

If you outlive your policy, your payout is cancelled. However, there is an exception. Return of premium or ROP as it's sometimes referred to as gives you back your premiums. Though you will pay higher premiums than a regular term life policy, which is to be expected.

How often should I pay for life insurance?

Life insurance premiums are typically paid on an annual or monthly schedule, but you are often given the option to pay semi-annually (twice per year) or quarterly (four times per year) as well. However, most people are better off choosing monthly or annual payments.

What is life insurance premium?

Your life insurance premium is the cost of purchasing your policy and keeps your policy in force. Annual and monthly payments are the most common payment frequencies, though some insurers allow you to pay premiums semi-annually or quarterly. Each has its advantages — annual payments save you some money, but monthly payments are more budget-friendly.

How much discount is on a monthly premium?

Annual premium payments usually have a 2-5% discount and monthly premium payments can be as low as $20. Semi-annual and quarterly premium payments have little-to-no advantage because you are paying a large lump sum with no discount.

Is splitting up insurance premiums better than missing?

While splitting up the premiums is better for some budgets, missing payments can risk a policy lapse. Annual premium payments mean that you only pay one lump sum to your insurer each year. That comes with a few key advantages, including fewer payments to track and a small discount.

What happens to your insurance if you die?

If you die your family will get the original death benefit, less the amount that was deducted from the cash value to pay the premiums. In addition to reducing the death benefit, if you want to surrender the policy or take a loan, the amount of funds available to you will be reduced.

What happens if you surrender a whole life insurance policy?

If you have a dividend-paying whole life insurance policy, or a participating whole life insurance policy, your life insurance company may pay dividends to you. Dividends are a portion of the life insurance company’s profits that is paid to policyholders who, ...

What is whole life insurance?

Whole life insurance policies offer life insurance coverage for the whole life of the insured person. Premiums are level and the death benefit (the amount your beneficiaries receive upon your death) is guaranteed as long as you continue to pay the premiums. In addition, whole life policies build up tax-deferred cash value, or savings, ...

What is a paid up addition?

Paid-up additions are paid-up miniature life insurance policies. They build up cash value equal to the amount you pay in (if you pay in $5, you accrue $5 in cash value). They also offer a death benefit, and earn dividends and interest from your insurance company, which are added to the cash value. These mini-policies are truly paid up; there are no ...

Do you have to pay premiums to keep a life insurance policy?

While you don’t have to continue paying premiums, you must technically still pay to keep the policy in force. Paid-up life insurance is an option that allows you to keep a whole life insurance policy in force without paying any premiums for a while, or permanently. It is only an option if you have already built up a significant cash value in your ...

Can you use dividends on whole life insurance?

Typically, dividends on your original whole life insurance policy can be used to purchase paid-up additions. Then, as the mini-policies earn dividends, you can use those to purchase more paid-up additions, and so on, allowing your cash value account to quickly compound. The ability to purchase paid-up additions is often included as a rider on ...

Is there a way to have life insurance coverage that is paid up immediately?

Is there really a way to have life insurance coverage that is paid-up immediately? Paid-up life insurance could be described as a life insurance policy that is paid in full, remains in force, and you don’t have to pay any more premiums. But it’s not really as simple as that.

What is the best way to pay for life insurance?

The approved payment methods for your first life insurance payment vary by provider, but the most commonly accepted forms are personal check, cashier’s check, or an electronic funds transfer (EFT). Your provider may accept a credit card for your first premium payment, but only accept check or bank transfer thereafter. Cash is never accepted.

How long does it take to pay life insurance premiums?

If you’re unable to pay your life insurance premiums due to job loss, disability, or some other major change in your finances, most policies include a payment grace period of 30 to 31 days after your payment due date.

Why is it important to have a reliable payment method for life insurance?

A reliable payment method is important since missed payments can lead to lost coverage, unless you have disability coverage or a policy with a cash value.

How to avoid a lapse in insurance?

One of the easiest ways to avoid a policy lapse is to set up a recurring bank transfer so that premiums are automatically withdrawn on the same day each month or year.

What is EFT insurance?

If you don’t want to use a personal or cashier’s check, an EFT is a reliable, technology-friendly way to ensure you make your insurance payments. Speak with your life insurance agent or consult your policy to confirm the payment methods accepted by your insurer.

Do life insurance companies accept credit cards?

Most life insurance companies only accept credit cards for your first premium payment. Insurers that do accept credit cards for recurring payments may charge an additional processing fee.

Does life insurance take credit cards?

There isn’t just one reason that life insurance companies don’t accept credit cards, though high fees and state regulations are the most commonly cited. Companies that do accept credit cards may not accept them in every state and may add a processing fee to every payment.

What are the factors that affect life insurance rates?

Life insurance rates are influenced by a number of factors, but your health has the biggest impact on the final cost. 2. You're planning to get married. If your soon-to-be spouse relies on your income to live the lifestyle you share, it's a good idea to get life insurance.

How long does a life insurance policy last?

How long your coverage lasts. Rule of thumb: Your term should last at least until you retire, and should also cover your longest financial obligation (like a child's college costs).

What is Policygenius?

Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price ». Most people aren't thinking about life insurance in their 20s, but it's often the best time to buy it.

Do life insurance companies consider occupation?

Life insurance companies will always consider your occupation when they assess your risk level. Simply put, if you work in a dangerous or high-risk environment, you have a greater chance of dying than someone who sits at a desk all day.

Do you need life insurance if you die prematurely?

3. You support aging parents financially. The general rule is that if someone else relies on your income to live, then you probably need life insurance.

Can you get a student loan forgiven if you die?

Federal student loans are forgiven upon death, but private loans may not be. If you have a co-signer on your private student loans or you live in a community property state, you may want to consider a life insurance policy. 5. You work for yourself.

Can you get life insurance if you are a small business owner?

5. You work for yourself. Life insurance can be incredibly beneficial if you're a small business owner, Anna Baluch reports for Business Insider. If you set up a "Key Person" or "Buy/Sell Agreement" life insurance policy, your employees or key stakeholders will still get paid in your absence.

Why do we need life insurance?

Why do you need life insurance? The top answer is that it will replace your income and ease the burden—both financially and emotionally—for your loved ones. Life insurance payments can be either a lump sum or regular payments, so you can find ways to make it affordable.

Why is life insurance important?

Here are the main reasons to consider life insurance as an essential element of long-term financial planning: 1. Create a financial safety net. A financial safety net means that your family’s finances will be secure if anything happens to you, which is tremendously beneficial to their peace of mind.

What happens to a business when an owner dies?

The sudden death of an owner can spell disaster for small businesses. Life insurance can provide the capital that will allow the business to transition to new leadership. Those funds can be used for re-building or restructuring the business to generate a continued income stream for your family and loved ones. Life insurance can be the difference between success or failure for the business after a sudden death.

How long is life insurance good for?

There are both life-long life insurance policies and term policies ranging from five to thirty years or more. As long as you keep paying the insurance throughout the duration of the term, the policy remains valid. Here are the main reasons to consider life insurance as an essential element of long-term financial planning: 1.

What does life insurance cover?

Insurance can cover a mortgage, medical and dental bills, college education, childcare, loss of income from spousal death, debt, taxes, and inheritance. The cost of life insurance varies based on the individual’s age, healthiness, the dollar value of the policy, and the policy term.

Why don't people have life insurance?

Of those surveyed, the number one reason for not having life insurance was a financial concern that it is too costly. But this is exactly why life insurance is important! Here are 7 powerful reasons why you need life insurance.

Does life insurance require lottery?

Life insurance doesn’t require entering a lottery. It is a guaranteed payment that will be released to your family if the worst happens and you pass away. Life insurance creates a financial safety net, removing the financial burden that the loss of a family member creates and leaving a legacy of care to your family.

What happens if you borrow against your life insurance?

Cons of Borrowing Against Your Life Insurance. If you were to die before paying back your policy loan, the loan balance plus interest accrued is taken out of the death benefit given to your beneficiaries. This could be a problem if your beneficiaries need the entire amount of the intended benefit. When the loan sits unpaid, the interest ...

How long can you pay off a policy loan?

You can pay it off in two months or let it sit without making any payments for years. However, even if no payments are made, the loan accrues interest that is added to the balance of the loan. 1 . Policy loans are not taxable income as long as the amount borrowed is equal to or less than the amount of premiums paid.

What happens if a loan is unpaid?

When the loan sits unpaid, the interest that accrues is added to the principal balance of the loan. 1 . If the loan balance increases above the amount of the cash value, your policy could lapse and risk termination by the insurance company.

How long does it take for a policy loan to be received?

In most cases, they are also tax-free. After you request the loan, a check is usually received in five to 10 business days. Funds from a policy loan can be used any way you choose.

Can you use a policy loan for vacation?

Funds from a policy loan can be used any way you choose. Because your policy's cash value acts as collateral for the loan, you can use the money for anything from household bills to a vacation. The insurance company does not require an explanation as to how you intend to use the funds.

Is a loan plus interest taxable income?

In the event of a policy lapsing or being surrendered, the loan balance plus interest is considered taxable income by the IRS, and the taxes owed could be a fairly large amount depending on the initial loan and interest accrued. 1 .

Is life insurance loan a pros or cons?

Updated Oct 22, 2020. Like any type of loan, life insurance policy loans come with pros and cons. It is important to look at both aspects before deciding whether to borrow against your whole life insurance policy.

What happens if you stop paying term life insurance?

With term life insurance, if you no longer have a need for insurance, you can simply stop paying. Once you stop, the policy lapses, and the insurance company will no longer pay any benefit if you pass away.

How long does a life insurance policy last?

How long your coverage lasts. Rule of thumb: Your term should last at least until you retire, and should also cover your longest financial obligation (like a child's college costs).

How long is term life insurance good for?

Term life insurance is good for people who want a financial safety net for a specific number of working years, such as the years of paying off a mortgage. You can buy a term length such as 10, 15, 20 or 30 years. A small number of companies even offer 40-year term life insurance.

What is whole life insurance?

Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who doesn’t want any guesswork after buying life insurance.

What is extended term life insurance?

Extended term life insurance: The company takes what you’ve already paid and converts your policy into a term life policy for the same death benefit. How long the policy lasts depends on how much you’ve paid, how old you are, and the company’s current rates for a policy of that size and duration.

How much does a 40 year term life policy cost?

That said, we found that a $500,000 40-year term life policy from Legal & General (the longest term life policy currently available) would cost about $700 a year for a healthy 30-year-old male. A $500,000 whole life policy from American National would cost about $4,060 — or 5.8 times more.

Is permanent life insurance whole life?

Permanent Life Insurance That’s Not “Whole Life”. Some people use the phrase “whole life insurance” very broadly to refer to any type of life insurance that can provide lifelong coverage. But there are other types of permanent life policies that can provide lifelong insurance that are not whole life insurance.

What happens if you stop paying term life insurance?

If you stop making payments on term life insurance, the policy will lapse and end after the grace period. If your payments stop on cash value life insurance, the insurer will generally use any cash value in the policy to cover the premiums. Once the cash value is exhausted, the policy will end.

Why is permanent life insurance more expensive than term life insurance?

Because a permanent life insurance policy provides coverage for life, as long as you pay the premiums due , it’s more expensive than a term life insurance policy that provides coverage only for a certain number of years. The higher cost of permanent life insurance—which includes whole life and universal life insurance policies—is a key reason some ...

How long can you go without paying your insurance premium?

Most insurance companies give policyholders a 30-day grace period from when the premium is due to pay it. Typically, you can go another 30 days without paying, and the policy will be in “lapse pending” status, Whitman says.

What is the benefit of permanent life insurance?

One of the benefits of permanent life insurance is that it builds up cash value. There are a variety of ways you can use the cash value to pay premiums. If you’ve had the policy for several years, you might have built up enough cash value to cover some payments. Whitman recommends ordering an in-force illustration to see what impact using ...

Why are grace periods so lenient?

Some insurance companies are offering grace periods that are even more lenient because of the coronavirus, and some states are requiring insurers to offer more flexibility for payments. Call your insurer to find out how long your policy will remain in force if you don’t make a payment. Ask for an in-force illustration to see what the impact ...

When do mutual insurance companies pay dividends?

Mutual insurance companies pay out dividends to policyholders in years when the companies are performing well. Dividends can be used to increase your cash value. They also can be used to offset premiums.

Can you keep your life insurance policy if you pass away?

Fortunately, with permanent life insurance policies, you do have several options to keep your coverage if you’re having trouble making premium payments.

What is a permanent life insurance policy?

The first is the insurance. This is the part that pays out when you die and that an insurer will charge you "cost of insurance" (COI). As you get older, this portion becomes more expensive. The second part is a cash-value account.

What is universal life insurance?

Universal life insurance is a type of permanent insurance, covering you until death just like a whole life policy. Universal life policies have a variable interest component that can change your premium payments for better or worse, depending on the market rates for other investments such as Treasury bills.

Can you change your death benefit with universal life?

You can also change your death benefit with a universal life policy. If you need more coverage and can pass an updated medical examination, you can easily add to your death benefit.

Does universal life cover COI?

The whole life policy spreads that cost out sort of like a mortgage does. Universal life doesn’t have the same feature. You need to pay enough to cover your COI, but you don’t have to pay excess. A universal life cash-value account is usually funded more heavily in the first few years of a policy.

Does life insurance lapse?

No lapse guarantee. Any life insurance policy exposed to the market may not work out as advertised. You might end up owing more to your policy than you ever imagined. No lapse guarantees make it so that, as long as you pay a minimum premium, your death benefit will remain in place, even as your account value drops.

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