Paid-up additions (PUAs) are an optional feature available on some types of whole life policies. PUAs refer to small increases in the death benefit (and cash value) of a life insurance policy for which no ongoing premium is due. Also referred to as paid-up additional life insurance, they are typically purchased with policy dividends, and no medical questions are required.
Definition and Examples of Paid-Up Additions
Paid-up additional life insurance is permanent life insurance that is added to an existing life insurance policy on which no subsequent premiums are due and for which no medical underwriting is required. It’s available on whole life policies issued by mutual life insurance companies.
Mutual life insurance companies issue dividends to policyholders (paid annually based on the company's performance) which may be used to purchase paid-up additions of life insurance. By using dividend payments in this way, you can gradually increase both the death benefit and the cash value of the policy over time without increasing the premium.
Think of paid-up additions as small packets of whole life insurance—they have a small associated death benefit and cash value amount, and can also earn dividends.
Policies that are entitled to dividends are called participating. In 2019, 30% of new individual policies purchased were participating. NY Life, Northwestern Mutual, and MassMutual, three of the largest life insurance companies in the U.S., are mutual companies.
- Alternate name: paid-up additional life insurance
- Acronym: PUA
How Paid-Up Additional Insurance Works
With all types of permanent life insurance, you have the option to convert the existing policy to a paid-up insurance policy. To accomplish this, the insurance company uses the existing cash value to purchase a new policy (usually with a lower death benefit) that is guaranteed to have no further premiums due.
Instead of being purchased with the cash value of the policy, paid-up additions of life insurance are purchased with annual dividends. Each one of these small policies has its own cash value, has its own death benefit, and earns dividends. Over time, PUAs can substantially increase the cash value and death benefit of the policy.
Dividends can fluctuate and are not guaranteed.
Let's consider a generic whole life policy on a healthy 45-year-old man to see how paid-up additions can work:
|Age||Premium||Dividend||Guaranteed Cash Value||Total Cash Value||Total PUAs Purchased||Death Benefit|
At the end of 20 years, the death benefit has increased by 34% and the cash value has increased by 37% relative to the values guaranteed in the original policy—as a result of regularly converting dividends into paid-up additions of life insurance. Plus, the projected dividend payment is equal to 88% of the premium.
Insurance policies guarantee minimum amounts for the death benefit and cash value. But policy values may, and often do, exceed these amounts, dependent upon the company’s earnings.
The dividend payment you receive is based, in part, on your policy’s cash value. As it increases, so does your share of dividends.
Paid-up additional insurance may be surrendered at any time for the cash value without impacting the original policy. Life insurance cash values, including paid-up additional insurance, are not taxed unless the policy is surrendered. At that time, the total cash surrender value less the total premiums paid is taxed at ordinary income rates.
Paid-Up Additions Rider
Some whole life policies offer the option to purchase PUAs with an additional premium, as well as with dividends. This option is called a PUA rider. PUA riders are used to further enhance the cash value and death benefit of the policy, often to take advantage of the "tax-free" income features of life insurance.
Life insurance cash values can be withdrawn from the policy up to the total premiums paid without incurring any taxes. However, you can instead borrow from your policy. In this case, you can borrow an amount more than the amount of premiums paid without incurring any taxes unless the policy is later surrendered. If the policy is not surrendered and remains in force until the death benefit is paid, no taxes are ever incurred, because life insurance death benefits are generally income tax free.
Any unpaid loan amounts at the time of your death reduce the death benefit your beneficiaries receive.
Do I Need Paid-Up Additional Insurance?
For whole life insurance buyers, paid-up additional insurance is a convenient way to increase the death benefit and keep pace with inflation or the growing financial needs of a family or business. Paid-up additional insurance also enhances the cash value which can be used for emergencies, or potentially as a source of retirement income.
Paid-up additional insurance can also be used systematically to pay the premium in later years.
Alternatives to Paid-Up Additional Insurance
There are a few other basic ways for policyholders to receive their dividends.
- Cash: Policyholders receive the dividend directly via check.
- Reduce the premium: The dividend is applied to the premium due.
- Accumulate: Dividends accumulate at interest and may be withdrawn at any time.
You may also be able to pay off outstanding loan amounts with dividends or purchase one-year term insurance to supplement your existing policy.
What PUAs Mean for Your Financial Plan
Paid-up additional insurance in participating whole life policies offers a convenient way to increase the death benefit of the policy each year without the need to undergo additional underwriting or increase the premium. It’s also a way to enhance the cash value and potentially supplement retirement income.
- Paid-up additions of insurance are small life insurance policies that supplement a larger underlying one.
- PUAs enhance cash values and death benefits, and can also earn dividends.
- Paid-up additional insurance is purchased in two ways: by policy dividends, or with an additional premium (if a PUA rider is elected).
- Paid-up additions can be surrendered for their cash value or to pay for premiums in later years.
ACLI. "Life Insurance," See Table 7.3. Accessed July 13, 2021.
NAIC. "2020 Top 25 Groups and Companies by Countrywide Premium," Page 1. Accessed July 13, 2021.
IRS. "Section 7702.—Life Insurance Contract Defined," Page 3. Accessed July 13, 2021.
IRS. "Life Insurance & Disability Insurance Proceeds." Accessed July 13, 2021.