What Is Reduced Paid-Up Insurance?

A bit of policy cash may be used to obtain a whole-life premium payment. Afterwards, the policyholder no longer pays premiums.

Using less paid-up insurance can reduce outlays, however there are other factors to keep in mind. Here, we take a closer look at what this insurance is and how it operates.

Definition and Examples of Reduced Paid-Up Insurance

Reduced paid-up insurance is one of the payout options found in a life insurance nonforfeiture clause. It's when you choose a reduced present day cash value of your whole life insurance policy as a payout option after your policy is forfeited.

You'll need to decide on the one that works best for you. Your insurance agent can let you know how much insurance is purchaseable for your cash value, and since you purchase a new policy with a single premium payment, you no longer need to make payments on your old policy. That can help you save money each month.

However, your new policy will have a small face value, which means your beneficiary will receive less money when you die. The amount of insurance you are able to purchase with your reduced paid-up option depends on two factors:

• Your current age
• The original policy’s cash surrender value

No matter your adjusted face value, the reduced paid-up insurance policy you buy has the same terms and conditions as your old one. A whole life policy continues to earn a cash value throughout your life as it earns interest or dividends are paid out.

How Reduced Paid-Up Insurance Works 

Let's say that you have a whole life permanent life insurance policy in place. Been making regular payments for it for years. Then, when you retire, make another budget, and decide you do not want to continue to make monthly payments, you can typically choose a surrender or non-forfeiture option. There may be charges and restrictions.

After reviewing the three types of payouts, you choose that the lower paid-up insurance option would meet your requirements. Your insurance agent reviews the provisions of your policy to learn what your present face value is and how much cash value you have built up over the years. They believe your current cash value is $13,005.

When these calculations are made, they explain why the younger you are, the more you end up getting in a car with this policy. The most ideal option for you is to proceed through the change.

This policy will continue to accrue cash value as you earn more interest. And since it s fully paid, you will no longer have to make premium payments. Upon your death, 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 purchase a policy for a lump sum payment. You won't have to worry about monthly installments.

Beneficiaries still receive a death benefit: It's possible to reduce the contribution of your beneficiaries, but you can always be sure that they'll get some help after you're die.

Policy continues to build cash value: As soon as you have purchased the replacement policy, it functions like your original plan. 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, your passengers will lose their coverage, including accidental death.

May have time limitations in place to avoid fees: A surrender charge period sometimes exists for certain life insurance policies. If you end your policy during this time, you'll have to remit an additional fee. Others may have stipulations in place that prevent you from making this type of change for a certain amount of time. Check the fine print of your policy for any such policies.

Beneficiary receives less when you die: You're buying insurance with a lower face value, which means a beneficiary is not going to receive as large as a death benefit when you die.

Key Takeaways

• Reduced paid-up insurance is only available for permanent life insurance. It is not available with term life insurance plans because they can't accrue a cash value. 
• With reduced paid-up insurance, you use the built-up cash value of your policy to submit an application for a downgraded, similar life policy that you are surrendering.
• If you paid the cash value in full with a single premium, you won't need to pay ongoing premiums. 
• Your beneficiaries will receive death benefits after you've passed away with low paid-up insurance, which will be a lot less than the benefit of your original policy.