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. Additionally, specific types of permanent insurance, such as universal life insurance can carry higher costs in the latter years of policy ownership.
A paid-up policy bridges the gap by providing permanent coverage for those who don’t want to continue to pay premiums in retirement. Different life insurance companies have different policy options. Paid-up options may be available from ages 65 to 95.
According to Pam Jenkins, assistant vice president for product and market development at Colonial Life: “Purchasing a paid-up whole life policy guarantees that coverage will stay in force with no further premiums due once the policy reaches that predetermined age.”
This provides the insured a solid foundation of 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, the younger you are when purchasing life insurance, the less expensive it will be. Paid-up whole life insurance offers the same premiums for the duration of the premium payment period. Paid-up policies can be issued to children, giving an affordable start to a lifetime of protection.
Jenkins 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 Jenkins. The higher premium payments result from the assurance of no longer needing to make premium payments in retirement, so it represents a fair trade-off.
This should be contrasted with universal life insurance, which carries the risk of increased cost of insurance as the insured gets older. “There is no guarantee that the cash value in a universal life policy will be sufficient to maintain the policy, especially if a loan is taken and not repaid or premium payments are missed over the years,” explains Jenkins. “This generally makes the paid-up option a guaranteed choice.”
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 death.
“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 Jenkins.
A paid-up policy 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.