What is paid-up life insurance?

While many people are familiar with the term “paid-up life insurance,” some mistakenly assume that it is a type of policy they can purchase outright—such as a term or universal life policy. This article will attempt to clear up any confusion that exists by explaining what “paid-up insurance” actually means, how you get it, and why it can be such a valuable tool.

A young man looking over a document with an agent.

Let’s set the record straight on paid-up life insurance.

While many people think “paid-up life insurance” is a type of policy they can purchase, it’s actually a state or condition where your coverage is paid-in-full (fully funded) and you do not need to make any additional premium payments in order to maintain the policy. Since this can be an attractive feature for many policy owners—especially those who are looking to control costs in the future—it’s important to remember that this option is usually available only on whole life policies.

Three ways to fully fund your policy.

There are several ways to fully fund your policy (pay if off faster). Since each operates very differently, let’s take a moment to explore three options:

  1. Customize your policy to pay fewer premiums: Some whole life policies, such as our Custom Whole Life insurance, allow you to choose your premium-payment period and accumulate cash value faster than others. As a result, you may be able to fully fund your policy in as little as five to 10 years. Of course, the fewer payments you make the higher each premium will be.
  2. Convert to reduced paid-up insurance:  If your need for coverage changes in the future, you may be able to use your dividends and any available cash value to purchase a portion of your coverage and thereby reduce your future premium payments.  If you choose this option, it’s important to realize that the death benefit protection you receive will be substantially lower than the original face amount of the policy. A New York Life financial professional can give you all the details.
  3. Capitalize on paid-up additions: Since many whole life policies are eligible to earn dividends,1 you can use this resource to purchase additional coverage. Because the cost of this additional coverage is completely funded by the nonguaranteed dividends, it can increase your level of protection without any increase in premiums. What’s more, this additional coverage is also eligible to earn dividends, so your policy’s value grows faster each time dividends are declared.

Here’s how paid-up additions work.

As you can see from the example below, a whole life policy features a guaranteed death benefit2, which is the face value of the policy at the time it is purchased. Each time dividends are declared, you can use them to purchase more coverage and increase your total death benefit protection.

Should you “pay off” your life insurance early?

There are lots of reasons why you may want to pay off (fully fund) your coverage: an increased or decreased need for coverage, future budgetary concerns, or the desire to build cash value faster are just a few. But as we’ve seen, the way to go about it can have a major impact on your level of protection. That’s why it is so important to consult a New York Life financial professional before making any decision.

Frequently asked questions

Cash value and nonguaranteed dividends are extremely important because they can help policy owners purchase paid-up additions. Since the cash value of a whole life policy grows at a guaranteed rate, it is easy to calculate how much you will have available to use at any given time.

The cash value of a whole life policy builds up gradually over time; however, the speed depends on the size of the policy, the frequency and size of your premium payments, the type of whole life insurance purchased, and whether or not the policy is eligible to earn dividends. A New York Life financial professional will be able to take all those factors into consideration and, depending on your selections, give you an illustration of how your policy operates.

If you have a whole life, custom whole life, or certain universal life policies, you will receive an annual statement that shows how much cash value you have accumulated to date. Of course, you don’t have to wait that long and are always welcome to contact your New York Life financial professional.

While it’s generally not a sound financial strategy, it is possible to cash out any policy that earns cash value (assuming it has had enough time to build up sufficient value). It’s important to remember, however, that you may incur surrender charges and will only receive the net cash surrender value that is currently available on the policy, which is likely to be significantly lower than the original face amount (death benefit) of the policy.

Paid-up additions are increases in coverage that you can purchase using dividends generated by a whole life policy (when they are declared by the company). Since this coverage is already paid-in-full, there is no increase in your premium payments.

Reduced paid-up insurance is a way for people who no longer need the same amount of coverage, or are concerned about keeping up with their premium payments, to essentially “buy out” their coverage. With this option, you can use your available cash value to purchase a reduced whole life policy that offers significantly less protection than was originally purchased but that is paid up in full.

Related Articles 

We’re here to help.

If you have additional questions about paid-up insurance, or whole life in general, please contact your New York Life financial professional.  That way, you’ll be sure to receive the information and guidance you need to make an educated decision*.


*New York Life Insurance Company is the issuer of New York Life Whole Life. In Oregon, the Whole Life policy form number is ICC18217-50P (4/18).

1 Dividends are available on participating whole life policies and are not guaranteed. When declared, dividends are awarded annually.

2 Any guarantees of the policy are based on the claims-paying ability of the issuer.