Reduced Paid-Up Insurance
Reduced paid-up insurance is a nonforfeiture option that uses a policy's cash value to purchase a smaller permanent life insurance policy that is fully paid up, with no further premiums required but a reduced death benefit.
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Exam Tip
Reduced Paid-Up = smaller death benefit but LIFETIME coverage and no more premiums. Extended Term = ORIGINAL death benefit but LIMITED time.
What is Reduced Paid-Up Insurance?
Reduced paid-up insurance is one of the standard nonforfeiture options available in permanent life insurance policies. When a policyholder can no longer afford premiums, they can use the accumulated cash value to purchase a smaller whole life policy that requires no additional premium payments.
How Reduced Paid-Up Works
- Policyholder stops paying premiums
- Cash value is calculated
- Cash value purchases smaller paid-up policy
- New death benefit is permanent (no expiration)
- No more premiums required ever
Example Calculation
| Original Policy | Reduced Paid-Up |
|---|---|
| Death Benefit: $250,000 | Death Benefit: $85,000 |
| Annual Premium: $3,000 | Premium: $0 |
| Cash Value: $45,000 | Used to purchase |
| Coverage: Until age 100 | Coverage: Until age 100 |
Reduced Paid-Up vs. Other Options
| Option | Death Benefit | Duration | Premiums |
|---|---|---|---|
| Reduced Paid-Up | Reduced | Lifetime | None |
| Extended Term | Original | Limited | None |
| Cash Surrender | None | N/A (policy ends) | N/A |
Key Characteristics
- Permanent Coverage - Policy remains in force for life
- Fixed Death Benefit - Smaller but guaranteed
- Cash Value Continues - May still accumulate cash value
- Loan Access - Can still borrow against policy
- No Premiums - Policy is fully paid up
When to Choose Reduced Paid-Up
Best when you:
- Need lifetime coverage
- Can accept a lower death benefit
- Want certainty of coverage
- Don't want term limitations
When Extended Term May Be Better
Better when you:
- Need maximum death benefit
- Have temporary coverage needs
- Don't mind time limitations
Study This Term In
Related Terms
Nonforfeiture Options
Nonforfeiture options are provisions in permanent life insurance policies that allow policyholders to access accrued cash value if they stop paying premiums, rather than forfeiting all benefits.
Paid-Up Insurance
Paid-up insurance is a life insurance policy that requires no further premium payments because the cash value has grown enough to cover all future costs, or it was purchased as a nonforfeiture option.
Extended Term Insurance
Extended term insurance is a nonforfeiture option that uses the cash value of a permanent life insurance policy to purchase paid-up term insurance for the same face amount, lasting as long as the cash value allows.
Cash Value
Cash value is the savings component of a permanent life insurance policy that grows tax-deferred and can be accessed through loans or withdrawals during the policyholder's lifetime.
Whole Life Insurance
Whole life insurance is a permanent life insurance policy that provides lifetime coverage with fixed premiums, a guaranteed death benefit, and cash value that grows at a guaranteed rate.
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