If you are considering creating a life insurance retirement plan (LIRP) so you can avoid the impact of taxes on retirement income, using a Whole Life Insurance policy can definitely get you there but paid-up additions will be key.

In David McKnight’s book, The Power of Zero, Mr. McKnight discusses the false assumptions offered by many financial planners that your tax liability will be lower at retirement than while you’re working.

It certainly doesn’t take a genius to realize that when you consider the enormous debt taxpayers must service and the unchecked spending that has been prevalent over the last three decades; the only place taxes are going is up. Not down, but up.

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Knowing this makes it more critical than ever that folks who are serious about retirement planning implement a LIRP as part of their wealth accumulation strategy. Why pay taxes on your retirement income if you don’t have to. The cash value is there for the taking, you just need to take it properly.

When you use 10-Pay Whole Life Insurance from a highly rated mutual insurance company (Ohio National comes to mind) and take advantage of the power of the PUA rider, the Power of Zero that David McKnight wrote about indeed becomes a reality.


What are Paid-Up Additions?


The PUA rider is the instrument used to add additional funds into the cash value of a participating whole life policy in order to increase the policy’s cash value accumulation.

Every single dollar of the insurance premium that is allotted to the PUA rider creates a tiny paid-up policy that has a separate cash value that is created instantly.

Generally, whole life insurance policies that have a significant part of premiums allocated to paid-up additions, will perform better than those policies where they are not taken advantage of.


Understanding the Power of the PUA Rider


Commonly referred to as additional insurance rider, enhance paid-up additions, and a couple of other catchy names, paid-up additions can have a huge impact on accumulating wealth in a whole life insurance policy for retirement income.

Your focus must remain on the insurance company paying dividends in paid-up additions to achieve the kind of cash-rich whole life insurance policy you’ll need for a well-designed LIRP.


Important Points to Know About


  • Dividend Option – The dividend option guarantees maximum cash accumulation in your whole life insurance policy.
  • PUA Rider – Many insurers will allow you to add paid-up addition to your policy via a PUA rider which allows the policyholder to overfund a whole life policy.
  • Build Immediate Cash Value – Dissimilar to traditional whole life insurance that typically takes several years to accumulate cash value, your paid-up additions can create cash value immediately.
  • Increase the Death Benefit – When paid-up additions create a mini whole life policy, this will result in an increased death benefit.
  • Increased Dividend Earnings – The paid-up additions also earn dividends which allow the policyholder to purchase even more paid-up additions.
  • Company to Company Variations – Since paid-up additions act differently among various insurance companies, make sure you understand how they work with the insurer you choose.
  • Fees are Inevitable – Paid-up additions have fees but they vary from company to company. Know what your fees are before making a carrier selection.


Paid-Up Additions in Simple Terms


An easy way to understand how paid-up additions will enhance cash accumulation in a whole life insurance policy is to consider two sources of premium payments going into your policy; base premium and paid-up addition premium.

Think of your base premium as a mortgage payment on a home loan. You pay off the house over time by making monthly mortgage payments (base premium).

Think of paid-up additions premium like adding a pool to your home but paying that addition in full. In most cases, the pool will instantly add value to your home, and like paid-up additions add value to your insurance policy and its death benefit and when you sell your home you’ll get substantially more than what you paid for it.

Even though PUA purchase a smaller death benefit, it contributes significantly more to your cash value and earns dividends to boot.

You can use dividends to buy paid-up additions that earn dividends to pay for more paid-up additions; and so on and so on while your death benefit increases with the additional insurance purchased.


Why Buy a Paid-Up Additions Rider?


Although the policyholder can elect to take dividends in paid-up additions, he or she can also add the PUA rider. The paid-up additions option is different than the rider, and here’s how.

With a paid-up additions rider in place, the policyholder can choose to purchase paid-up additions with additional premium rather than using dividends. This represents another method for increasing the death benefit.

There are many insurance companies that will allow the policyholder to use the PUA dividend option and add the PUA rider which allows the policyholder to purchase paid-up additions with earned dividends and purchase paid-up additions directly with the additional premium they elect to contribute to the insurance policy.

When the policyholder takes full advantage of paid-up additions by using dividends and premium, they are effectively putting the cash accumulation on steroids. And, the additional cash value kicks in immediately.


What’s all this got to do with The Power of Zero?


Great question; and here’s the short answer.

When you take advantage of the power of paid-up additions, you allow your whole life policy to accumulate substantial cash value over time. When the time comes to start taking an income stream from that vault of cash you have accumulated, you’ll do so by taking loans from the company and using your vault of cash as collateral. Any outstanding loans will be deducted from the death benefit when you die.

Although you’ll pay interest on the loans, you’ll not be required to repay them and more importantly, these annual loans (income stream) become your retirement income which is tax-exempt. Now you’ve achieved the Power of Zero.


Frequently asked Questions

Are paid-up additions a good idea?

Absolutely. Your paid-up additions will create another small policy that will earn interest and dividends that will help you get more paid-up additions.

How else can I use dividends on my Whole Life policy?

Your annual dividends can be taken as cash, they can be applied to future payments, and they can be used to purchase additional life insurance. Your dividends can also be held in an interest-bearing account that you will have access to when needed.

Are there alternative ways to get paid-up additions?

You can buy paid-up additions anytime by paying additional premium to the insurer and designating it for paid-up insurance.

Can I surrender my paid-up additions at a later date for cash?

Yes. Paid-up additions can be surrendered for their cash value or to pay for premiums in later years.

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Curt Gibbs