What are paid up additions (PUA's)?
Paid up additions are small, mini whole life coverages purchased through life insurance dividends on participating whole life policies.
How they work
To understand PUA's, we first need to understand participating whole life insurance policies. Participating whole life policies are priced conservatively by the actuaries. They make assumptions on three primary expenses: higher than expected mortality and administration costs, and lower than expected interest rates on reserves/internal investments. For the sake of an example, let's say that they conclude your life insurance premiums on a participating whole life policy is $300.
Then each year, the company reviews the performance of those three expenses and generally concludes that their actual experience was better than the original conservative estimates. The company then refunds you a portion of your premiums. Let's say that refund in one year is $25.
Now the $25 can come back to you as cash as a refund of your premiums, but there's a few other choices available. One of the choices is to purchase additional life insurance. This additional life insurance is a mini participating whole life policy with a single premium — the amount of the dividend. So in this case, your $25 dividend automatically purchases a $300 death benefit participating whole life coverage (it's a distinct coverage, but integrated into your existing policy). That additional $300 in coverage also has it's own mini cash value and mini dividends each year.
Two ways PUAs impact your policy
There are two ways these PUA's can impact your participating whole life policy. First, in the case of enhanced whole life (we don't recommend this type of coverage), it's used as part of an overall strategy to reduce premiums.
Secondly, the PUA's can just be added to your existing coverage. If you had $25,000 of participating whole life in year 1, then in the above example in year 2 you have $25,300 of whole life — the base $25,000 and the additional $300 of PUA's. Over time the addition of PUA coverage can substantially increase your overall coverage and cash values in a non-guaranteed fashion.
Guarantees
PUA's are not guaranteed, because they're purchased with dividends that are not guaranteed. However, PUA's are vested which means once a PUA's coverage is purchased, it's coverage and cash values are locked in and guaranteed for life.
If you have any questions about your life insurance coverages, please contact The Term Guy at (416) 642-6820.