A Life Insurance Policy, under which all premiums have already been paid, with no further payments due, is a Paid Up Insurance. Typically, when someone takes a life insurance policy, a premium is required to be paid every year. But in this insurance plan, payments are made only for a pre-set period of time, for the policy will get to a point where it will be paid up. After that, it will remain in effect until the policy owner reaches a predetermined age, or until the policy is cashed in (whichever comes first).
In essence, over a period of time, the policy cash reaches such an amount that if the individual decides not to pay the premium; the banking institution can use the cash value to pay for it. Of course, once that amount is on the verge of exhaustion, the company gets in touch with the policy holder, so he/she may start paying the premium again. At this point, if the owner doesn’t pay the premium, he/she loses the life coverage. When the policy owner dies, the heir gets the death benefit, subtracting the amount that was taken out for paying the premiums and the interest on that cash.
To be eligible for this kind of insurance one has to be below 45 years of age; and usually 65 is set as the age when paying premiums can be stopped.
If the owner decides to withdraw from a Paid Up Insurance Policy, he/she may or may not have to pay tax. It depends on how much profit was made during the years that he/she invested in the policy. If there was no profit, then there shall be no tax levied on the withdrawal amount. But, if there was some gain, only the gained amount shall be taxed; the rest shall be tax-free. Essentially, if you withdraw more than you are paid, you will be paying an income tax; else, the money is all yours.
There is also Reduced Paid Up Insurance. The policy owner decided to stop paying the premium, so the banking institution uses the owner’s policy cash to continue the same insurance policy, but the death benefit gets reduced. The policy holder, thus, makes no more payments, making it a form of Paid-Up Insurance, which will give him/her a lower benefit than stated in the original insurance policy; hence the name “Reduced”.
Some people have inhibitions when it comes to an insurance policy that it is paid-up, believing that it may have a negative effect on their other insurance policies, or maybe will hamper any new policy that they take in the future. Rest assured, this kind of a policy will not come in the way of any prior, existing or future investments.
That is why it is really important to have a good insurance agent who will explain the pros and cons of every insurance plan, so as to eliminate all traces of doubt and fear from the minds of an investor. A Paid-Up Insurance plan is deemed useful for those who have a fixed income, or those who would feel secure knowing that their life insurance will be paid up when they retire.