Paying for life insurance, in most instances, is just like auto or homeowners insurance – you have to pay premiums on a regular basis to enjoy the benefit of the policy. This makes sense as you’re paying for a service that’s provided to you. Not paying the premium means the coverage lapses, providing you no protection.
When you’re earning income, keeping an insurance policy in force may not be an issue. However, as you look toward retirement, that might not be the case. If you are unable to pay premiums during your retirement years, you put your coverage at risk at a time when you may need it the most. Through a paid-up whole life policy though, you can mitigate much of that risk while also providing permanent coverage.
The benefit of permanent coverage
There are two main types of life insurance: term and permanent. Term is as it sounds; it lasts for a particular period of time and expires. By contrast, permanent coverage endures for the duration of your life. Both types of insurance are only good as long as you pay your premiums. While term insurance is generally less expensive, the cost increases as you get older. Permanent life insurance such as whole life and universal life increase in cost the older you are when you purchase them.
A paid-up policy bridges the gap by providing permanent coverage for those who don’t want to continue to pay premiums in retirement. Additionally, you no longer have to pay premiums to keep the policy in force.
According to Annise Henson, product and market development manager at Unum: “Purchasing a paid-up whole life policy guarantees that coverage will stay in force with no further premiums due once the policy is paid up at a predetermined age.” This provides the insured peace of mind that they have permanent coverage without having to pay any premium costs later in life.
When is the best time to buy a paid-up policy?
Generally speaking, life insurance is cheaper the younger you purchase it. This holds true for a paid-up policy. The benefit with a paid-up whole life policy is that you get the same premiums for the premium payment period. That being said, paid-up policies can be issued anywhere between the ages of 15 and 50 and are also available for children and grandchildren. The latter would generally be done in a gifting situation.
Henson explains one potential risk with a paid-up policy – higher premium payments. “The only potential drawback to a paid up policy is higher premiums being required during the premium payment years,” says Henson. The higher premium payments result from the assurance of no longer needing to make premium payments past the paid up age, so it represents a fair trade-off.
This should be contrasted with universal life insurance, which is a combination of a term life insurance product with a cash accumulation fund (or cash value). Universal life premiums increase as the insured ages, but the cash value grows at current interest rates, usually with a minimum interest rate guarantee. However, cautions Henson, there is typically no guarantee that the cash value in a life insurance policy will be sufficient to maintain the policy in force, because there are a number of factors in play: interest, premium payments made, loans taken and/or not repaid, etc.
“This generally makes the paid-up option a wiser, more predictable choice” she says.
Saving more for retirement vs. purchasing a paid-up policy
Buying life insurance is a key part of retirement planning as it provides for final expenses upon your passing. It makes sense, on one level, to save as much as you can for retirement and skimp on life insurance coverage needs but that may open your loved ones up to risk if you were to suffer an untimely passing. “If someone dies young, they may not have saved much at all compared to the death benefit on a life insurance policy. People may also be tempted to dip into savings for other purposes meaning the funds might not be available at death,” says Henson.
The other benefit to a paid-up policy is that it means no life insurance premiums need to be paid during one’s retirement years. Many people experience lower income during their retirement years; having permanent coverage without premium payments provides the ability to allocate resources elsewhere without giving up insurance protection.
Life insurance and retirement go hand-in-hand. A paid up policy helps you maximize your resources with little extra out of pocket cost.
*Different life insurance companies have different policy options. Paid up options may be available from ages 65 to 95.