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Reduced Paid-up Insurance

What is Reduced Paid-up Insurance?

Reduced paid-up life insurance is an option that whole life insurance policy owners can explore if they want to stop paying their premiums or are unable to continue paying them. This option converts the policy’s cash value into a smaller death benefit that requires no further premiums.

How reduced paid-up insurance works

Some insurers offer this option to life insurance policy owners, specifically people with whole life insurance coverage.

The policy owner generally explores reduced paid-up coverage when they want or need to stop making premium payments. It might be a good option after losing a job or when your insurance needs decrease, like when you pay off your mortgage.

If you choose this option, you give up your current life insurance policy and replace it with coverage that is reduced and paid-up. This gets funded by the cash value of the policy you’re replacing with the reduced paid-up insurance.

To make it easier to understand, let’s look at each component individually:

Paid-up: The new coverage uses your cash value to pay for the death benefit in full. That means that once you convert to reduced paid-up insurance, you don’t need to make any future premium payments. From that point on, the policy stays in force for the remainder of your lifetime without requiring any more money from you.

Reduced: While payment-free, permanent life insurance probably sounds pretty appealing, reduced paid-up insurance comes with a downside. Because the coverage needs to be fully funded by your accrued cash value, the death benefit will be significantly smaller than the death benefit of the whole life insurance policy that you’re giving up.

Reduced paid-up insurance also means forfeiting any riders that you had attached to your original life insurance policy.

How your new death benefit is calculated

How do insurers decide on the amount of your reduced paid-up insurance death benefit? They consider three main areas: the total amount of premiums you have paid into the policy so far, your age, and the policy’s accrued cash value.

While all three factors come into play, in many cases, the death benefit of your reduced paid-up life insurance will equal the cash value you had accrued. If you had $50,000 in cash value, for example, your reduced paid-up coverage may come with a $50,000 death benefit.

Alternatives to reduced paid-up life insurance

Of course, you can choose to continue paying your premiums in order to keep your current, more sizeable death benefit in place. But if you’re financially unable to stick to the policy’s premium schedule, you have another option beyond reduced paid-up life insurance.

Specifically, you can surrender your policy. In exchange for giving up your policy, your life insurer will pay you the policy’s accrued cash value, minus any surrender fees. This gives you a lump sum of cash you can use now, but it leaves your loved ones without the cushion of a life insurance payout when you pass away.

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