Understanding 'Fully Paid Up' Status in Permanent Life Insurance Policies

When it comes to permanent life insurance policies, the term fully paid up is important to understand. This means that no further premium payments are required or allowed. With a fully paid up policy, you have already made the required payments to the insurance company in one lump sum. This section explains what this means for your insurance coverage and the benefits and drawbacks involved.

What Does 'Fully Paid Up' Mean for My Policy?

When a policy is described as fully paid up on a permanent life insurance contract, it means that you have already paid the full amount of the contract in advance. No future premium payments are required, allowing the insurance to remain in effect until the policyholder's death. Essentially, you provide a large payment upfront, and the insurance company aims to recoup their investment through the expected lifespan of the policyholder and the interest that the cash value accrues.

In practice, this means that you do not have to make any more payments, but the insurance policy remains active until the policyholder dies. If the policyholder passes away, the face amount, or the death benefit, will be paid out to the beneficiaries, provided there are no outstanding loans on the policy.

The Role of Cash Value in Permanent Life Insurance

Permanent insurance, such as whole life insurance, includes a feature known as cash value. This cash value is the amount of money that you can access from the policy if you choose to surrender it or take out a loan. The cash value is the portion of the premium that is invested in the policy, which earns interest over time.

Non-Forfeiture Values

The cash value also gives you several options if you decide to stop paying premiums. There are three main options:

Reduced Paid Up: This option allows you to maintain the level of insurance coverage you originally purchased (the face amount) but reduces the annual premium to what the cash value can cover. If the cash value is insufficient, you will not be able to reduce the paid-up value. Extended Term: This option allows you to extend the term of the policy based on the cash value that is available. The policy will provide a predetermined amount of coverage for a specified number of years, determined by the cash value. Withdrawal or Surrender: You can also choose to withdraw or surrender the policy, which would return the cash value to you. However, any lending activity against the policy must be repaid, and taxes or penalties may apply.

Assured Amount and Premium Payments

For a term life insurance policy, if you have an ensured amount of 20,000 for a twenty-year term with an annual premium of 1,700, you need to pay the premiums for the entire term. If you miss two years of payments, the policy may be treated as cancelled, and the premium paid would be forfeited.

However, if you have paid premiums for two or three years and are unable to continue paying, you should notify the insurance company. The insurer may treat this policy as fully paid up or paid up in full. The policy would then continue to run based on a proportion of the premiums paid over the total premiums payable, and it would remain in force until the end of the term or until the policyholder's death, whichever comes first.

Conclusion

The fully paid up status in permanent life insurance policies is a significant consideration for those looking for long-term financial security. While it requires a sizeable initial investment, it provides peace of mind regarding continued coverage without further premium payments. Understanding the intricacies of cash values and non-forfeiture options is crucial for making informed decisions about life insurance coverage.