What Is Paid-Up Additional Insurance (PUA)?
Paid-up additional insurance (PUA) consists of small, fully paid parcels of whole life insurance that you purchase—usually with policy dividends—inside a participating whole life policy. Each PUA parcel has its own death benefit and cash value, and it also participates in future dividends. Because PUAs are “paid up,” no future premiums are due on those parcels once purchased.
Key takeaways
– PUAs let you use dividends from a participating whole life policy to buy additional, fully paid life coverage that immediately adds to both death benefit and cash value.
– PUAs compound: they earn dividends themselves, which can be used to buy more PUAs.
– PUAs require a participating whole life policy (typically issued by mutual insurers); dividends are not guaranteed.
– A PUA rider lets you contribute extra premium dollars to buy more PUAs than dividends alone would allow; riders must usually be set up when the policy is issued (or added later subject to insurer rules).
Understanding paid-up additional insurance
How PUAs work
– You receive dividends from a participating whole life policy. Instead of taking dividends in cash or applying them to premiums, you elect to use them to buy PUAs.
– Each PUA increases the policy’s death benefit and cash value immediately. Because PUAs themselves earn dividends, the effect compounds over time.
– PUAs are permanent: once purchased, no additional premiums are required for those units.
Why consumers use PUAs
– Increase death benefit and cash value without underwriting or higher ongoing premiums.
– Useful if health declines after original policy issue date (you can increase coverage without medical underwriting).
– Build policy value more aggressively as a long-term strategy.
Fast fact
PUAs are available only on participating whole life policies (commonly offered by mutual life insurance companies). Dividends are typically declared annually and are not guaranteed.
PUA Rider (paid-up additions rider)
What it is
– A rider that lets you pay extra premium above the base policy premium specifically to purchase additional PUAs.
– It accelerates the ability to build cash value and death benefit compared with relying on dividends alone.
Common rider features and trade-offs
– Riders have differing names and mechanics across insurers (e.g., “paid-up additions rider,” “additional life insurance rider”).
– Some riders are flexible (allowing contributions within min/max ranges each year); others require set contribution amounts or could lapse if you stop contributing.
– When comparing two identical policies where one has a PUA rider and one doesn’t, the rider policy may show lower initial cash value and death benefit but can surpass the non-rider policy in guaranteed net cash value over many years. This is generally a long-term strategy (often decades) to maximize cash value.
Dividends: options and characteristics
Typical dividend uses on participating whole life policies
– Purchase PUAs (most common for permanent policy growth)
– Reduce premium payments
– Receive dividends in cash (a check)
– Leave dividends on deposit to accumulate interest
– Apply dividends to reduce outstanding policy loans
Important notes
– Only member-owned mutual companies typically pay dividends, and dividends are not guaranteed. Look at an insurer’s dividend history when planning to use PUAs as a strategy.
Reduced Paid-Up Insurance vs. Paid-Up Additions
– Paid-up additional insurance: additional small whole life parcels purchased with dividends or rider contributions; they increase death benefit and cash value while remaining individually paid-up.
– Reduced paid-up insurance: a nonforfeiture option used if you stop paying premiums on a policy with cash value. It converts the policy’s cash value into a single, smaller fully paid-up whole life policy—resulting in a lower death benefit than the original policy. This is different from PUAs and is a lapse-protection option.
Practical example
– Scenario: A 45‑year-old male buys a whole life policy with a $100,000 death benefit and a $2,000 annual base premium.
– In year one he contributes an extra $3,000 to a PUA rider. Those PUAs might immediately add (for example) $15,000 to his death benefit and create immediate cash value. Over time, those PUAs earn dividends and can be used to purchase more PUAs, compounding the policy’s cash value and death benefit.
– Note: the size of death benefit added per dollar of contribution varies by insurer, product, and age. This example illustrates the mechanism, not a guaranteed result.
Special considerations and risks
– Dividends are not guaranteed. PUAs depend on the insurer’s dividend performance.
– PUAs are a long-term strategy. It can take many years (often decades) for extra contributions via a PUA rider to materially change the overall death benefit compared with alternative allocations.
– Rider availability and terms vary: some insurers require the rider at policy issue, some allow later additions but subject to age, health, or other factors.
– Tax considerations: life insurance death benefits are generally income tax-free to beneficiaries, and cash value growth is tax-deferred while inside the policy. However, tax rules are complex—consult a tax advisor.
– Loans and surrenders: you can take loans against PUAs and surrender PUAs for their cash value, subject to policy terms.
Pros and cons (summary)
Pros
– Increases both death benefit and cash value without further underwriting.
– PUAs compound because they themselves participate in dividends.
– Flexibility to buy PUAs with dividends or extra cash via a rider.
– Good option if you expect health declines that would make new underwriting costly or impossible.
Cons
– Dividends are not guaranteed—relies on insurer performance.
– Benefits primarily realized over a long time horizon.
– Rider terms and contribution flexibility differ between insurers.
– May reduce short‑term death benefit or cash value compared to other product structures (depending on how premiums are allocated).
Practical steps: how to evaluate and use PUAs
1. Confirm policy type
– Make sure you have (or are buying) a participating whole life policy. PUAs are not available on term or non‑participating whole life policies.
2. Review dividend history and insurer strength
– Ask for the insurer’s long-term dividend track record and financial strength ratings. Dividends are not guaranteed, so a strong history and ratings matter.
3. Request illustrations
– Ask for policy illustrations showing multiple scenarios: dividends used to buy PUAs, dividends taken as cash, and use of a PUA rider. Look at projected cash values, death benefits, and the effect of adding rider contributions.
4. Understand rider details
– If considering a PUA rider, confirm when it must be added (at issue or allowed later), contribution minimums/maximums, whether amounts must be level or can vary, and effects if contributions stop.
5. Compare alternatives
– Compare the PUA strategy against other uses of the funds: buying a separate policy, investing outside the policy, or applying dividends to lower premiums.
6. Consider the time horizon and liquidity needs
– PUAs benefit long-term growth; ensure you’re comfortable with limited liquidity early on and potential policy loan mechanics.
7. Get professional advice
– Work with a licensed life insurance agent/broker and, if appropriate, a financial planner and tax advisor to determine if PUAs align with your goals and tax situation.
Additional resources and reading
– Investopedia — Paid-Up Additional Insurance: https://www.investopedia.com/terms/p/paidup-additional-insurance.asp
– National Association of Insurance Commissioners — Life Insurance basics: https://www.naic.org (general consumer guidance)
– ParadigmLife — What Are Paid Up Additions (PUA)?: https://paradigmlife.net (explanatory article on PUA riders and strategies)
Bottom line
Paid-up additional insurance is a powerful tool inside participating whole life policies to grow death benefit and cash value without further underwriting. It works best as a long-term strategy with insurers that have a reliable dividend history. Before committing, obtain detailed illustrations, verify rider terms, and consult a qualified insurance or financial professional to ensure it matches your objectives.