You purchase life insurance. You know you will need to make payments on the policy. Most of the time, the payments you make will continue long-term.
Sometimes, you may learn you have a paid in full policy. This type of policy implies you no longer have to make payments. This may be true, but there are a few things to know about this type of coverage.
How Whole Life Insurance Works
Paid in full applies only to whole life insurance policies. Some of these policies remain in place throughout your life. They remain this way as long as you make payments on them.
During this time, each payment you make goes to different tasks. Some of it goes to the insurer. Some of the payment is an investment. Another portion adds to the death benefit. At some point, you may run into a few options. This occurs when you may not have to keep making payments.
You Reach Paid Up Status
The investment component of a whole life insurance policy is important. You can borrow from this throughout your life. You also can use it to provide a retirement income for yourself. If you do not use it, though, there are some options available to you.
Over time, the amount you invest into your policy grows. So does the value of it. The insurance carrier sets this point. Generally, it is years into the policy. The insurer will alert you of an opportunity to convert the policy to a paid-up policy. You no longer have to pay premiums.
The reason is simple. The value of the investment is high enough to pay those premiums for you. The policy remains in effect because the value of the policy is high enough to continue payments to cover administrative costs and the death benefit. You generally no longer can borrow from your policy at this point, though. Your family will still receive the death benefit at the end of your life, though.
This may be beneficial to some people who no longer want to make payments. Your insurer may allow you to convert the policy to stop the payments. However, consider very carefully if you want to use this money for another purpose.
Paid Up Addition
A secondary option is to add more coverage to your policy. After a certain point, your dividends (the amount of investment you have not taken) can grow. You may wish to purchase higher dollar amount coverage with those funds. You do not have to make the same payment. Your dividends cover it.
The dividends from a whole life insurance policy can be very valuable. They can help you to maintain coverage when it becomes too hard to make payments.
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