You’ll need to pick the one that works best for you. Your insurance agent can tell you how much insurance you can buy for your cash value. Since you purchase a new policy with a single premium payment, you no longer have to make payments on your old policy, and your coverage is guaranteed for life. This can save you money each month. However, because your new policy has a smaller face value, your beneficiary receives less money when you pass away. The amount of insurance you’re able to purchase with your reduced paid-up option depends on two factors:
Your current ageThe original policy’s cash surrender value
No matter the adjusted face value, the reduced paid-up insurance policy you purchase has the same terms and conditions as your old one. As a whole life policy, it also continues to accumulate a cash value throughout your life as it earns interest or dividends are paid.
How Reduced Paid-Up Insurance Works
Let’s say you have a whole life permanent life insurance policy in place. You’ve been making payments for years. Then, when you retire and create a new budget, you decide you no longer want to continue to make regular premium payments. (You can typically choose to surrender your policy or use a non-forfeiture option for any reason, though there may be charges or restrictions.) After reviewing the three types of payouts, you decide that the reduced paid-up insurance option would best meet your needs. Your insurance agent reviews your policy details to see what your current face value is and how much cash value you’ve accumulated over the years. They determine that your accumulated cash value is $13,005. This cash value, they determine also after factoring in your age, can buy you a reduced paid-up policy with a death benefit of $30,990. You think that benefit fits your needs, so you fill out the paperwork to request the change. This policy would continue to build up cash value as it earns interest. And since it’s paid in full, you’d no longer have to make premium payments. When you pass away, your beneficiary would receive the face value.
Pros and Cons of Reduced Paid-Up Insurance
Pros Explained
No monthly payment: You’re using your cash value to buy a policy with a lump-sum payment. You won’t have monthly premiums to pay. Beneficiaries still receive a death benefit: The benefit may be reduced, but you can still have peace of mind that loved ones will get some money when you die. Policy continues to build cash value: Once you’ve purchased the replacement policy, it works exactly like your original policy. It can build cash value with interest. You can use that cash value for other financial reasons, like taking out a loan.
Cons Explained
Riders drop off of policy: Once you take a nonforfeiture option, all riders drop off your policy, including accidental death. May have time limitations in place to avoid fees: Some life insurance policies have a surrender charge period in place. If you give up your policy before then, you’d have to pay a fee. Others may have rules in place that prevent you from making this type of change for a few years. Check your policy for any restrictions. Beneficiary receives less when you die: You’re buying a policy with a smaller face value. This means your beneficiary isn’t going to get as large as a death benefit when you die.
