Buying life insurance can be intimidating, and even reading about it can be unpleasant. The way some websites and bloggers tell it, you're in a titanic struggle against evil agents bent on selling you whatever has the highest commissions. The truth is more nuanced, with term insurance offering the best value for most young buyers and permanent insurance providing some interesting options for those with different needs. One of those options is "reduced paid-up insurance," which ends your obligation to pay premiums but leaves you with coverage in place.
Permanent Insurance Primer
Life insurance is divided into two main types, permanent and term. As the names suggest, permanent insurance lasts your whole life, while term insurance expires after a predetermined number of years. Permanent insurance costs more, often a lot more, because like a house it builds equity over time. Eventually, the policy is paid for completely, and you can stop the premiums. Alternatively, you can stop the clock at an earlier stage and buy up a smaller amount of insurance with the equity in your policy. That's why it's called reduced paid-up insurance.
There are several reasons to opt for reduced paid-up insurance. One of them is financial success. If your investment plans have worked out well, your estate can often provide for your loved ones with little or no need for life insurance. If your policy has accumulated substantial equity, you can convert it to a smaller but still useful amount of fully-paid coverage. You'll never pay another premium, but the policy remains in force to defray funeral expenses or estate taxes. Most will grow slowly over time as cash values once again build up within the policy.
Another common use of reduced paid-up insurance is as a nonforfeiture option. With term life insurance, if you stop making premium payments the policy will quickly lapse and leave you without protection. With a permanent insurance policy, you can convert it to a reduced amount of paid-up coverage. This solution isn't ideal since it decreases your coverage without reference to your actual needs. On the other hand, it ensures your loved ones will have some coverage if worst comes to worst.
Not all paid-up insurance results in a reduced death benefit. It can also be used to increase the amount of your coverage. Usually, your policy will accumulate equity in the form of cash. As an alternative, you can ask the insurer to break up the equity into small amounts of paid-up coverage. Some policies also pay dividends, which can be taken as paid-up insurance. Over the life of your policy, this can add up to a big increase in your death benefit without affecting your premiums.
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