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- Paid-up additions are a dividend strategy that lets you buy additional whole life coverage without paying out-of-pocket premiums
- The additional coverage is purchased using the dividends that have been generated on your participating whole life insurance plan
- Paid-up additions increase the death benefit, add to the policy’s cash value, and are eligible for future dividends
- You can also utilize the dividends for premium reductions
Paid-up additions or PUAs in whole life insurance are a smart dividend strategy that lets you buy additional coverage without out-of-pocket expenses. The dividends that your par policy earns are used to pay for this coverage. It is one of the smartest ways for individuals who are looking at the long-term growth of their whole life policy to buy extra coverage.
When your participating whole life coverage grows with paid-up additional insurance, it also:
- Increases your death benefit
- Builds cash value
- Earns future dividends (not guaranteed)
In this blog, we will explain how paid-up additions work, why they matter, and how you can use them to grow your whole life policy’s value.
How do paid-up additions work in Canada?
Let’s understand how paid-up additions work with an example:
Mr. Oliver is a 40-year old business owner from Toronto who has a participating whole life insurance policy with a coverage of $100,000. His insurer has been performing well in the market, and he ends up earning dividends of $2,000 ((hypothetical, not guaranteed) at the end of the financial year. Instead of converting the dividends into immediate cash, Mr. Oliver uses them to reinvest through PUAs. Here’s what happens in this scenario:
- He earns $2,000 in dividends, which increases the overall death benefit and cash value in the first year
- In the next year, the increased coverage amount earns him even higher dividends, as paid-up additions are also eligible to earn dividends. He further buys more PUA in the 2nd year
- Over the years, say 10 years, he continues earning dividends and through the compounding growth, his death benefit increases to $120,000, along with a cash value growth
Mr. Oliver gets this compounded growth despite not paying any extra premium. In the event of immediate financial needs, he can also borrow against the policy’s cash value.
Disclaimer: Please note that the above premiums are used for reference purposes only.
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Benefits of paid-up additions in whole life insurance in Canada
Paid-up additions in whole life insurance enhance your policy’s value, help you grow wealth, and increase your borrowing power through policy and collateral loans. Some of the key benefits of PUAs are:
- Increased death benefit: Each PUA you buy adds to both cash value and permanent death benefit of the base policy. As more PUA are purchased over time, the death benefit grows automatically without additional out-of-pocket premiums, creating a compounding effect that increases the total payout your beneficiaries receive
- Tax-deferred cash growth: The cash value growth through the PUA is tax-deferred. There will be no tax implications until you actually withdraw it, take policy loans against it, or when the limits exceed the ACB
- No additional premiums: As the name suggests, it is paid up, meaning you don’t need to pay additional premiums for this additional coverage. The premium will remain the same without compromising on the growth of the death benefit and cash value through paid-up additions
- No underwriting required: You can avail the benefits of paid-up additionals without the need for medical underwriting. This feature becomes beneficial for those whose health has declined after they have bought the whole life insurance premium, and who want to get additional coverage without paying extra premiums. However, some insurers may require underwriting for larger PUAs
- Enhanced borrowing capacity: Paid-up additions increase the policy’s cash value. A higher cash value can increase your available policy and collateral loan amount
Difference between paid-up additional insurance and enhanced insurance
While both paid-up and enhanced insurance are dividend options available in a participating whole life insurance policy, they serve different objectives. Paid-up additions focus on increasing the coverage, while enhanced insurance aims to boost the death benefits by combining term insurance with paid-up additions. The two are also different in other respects, which have been detailed in the table below.
Paid-up additional insurance vs enhanced insurance
| Parameter | Paid-up additional insurance | Enhanced insurance |
| Purpose | Dividends pay for the additional insurance | Dividends are paid for PUA and one-year term insurance |
| Premium | No additional premium required | Base premium covers for both permanent policy and term insurance |
| Cash value growth | Faster, as PUAs also earn dividends | Slower until the term insurance is replaced with paid-up insurance |
| Flexibility | High, you can choose how much to reinvest in PUAs | Moderate |
| Ideal for | Those seeking long-term wealth growth | Those who initially want higher protection |
Other ways to use dividends in a participating whole life policy
Dividends in a participating whole life policy are flexible, and policyholders can choose how to use them based on their financial goals. The right way to use dividends depends on whether you want immediate cash or long-term growth. In addition to using them to buy paid-up additions, they can also help reduce the premium, cash withdrawals, and earn interest, all of which have been discussed in the section below.
- Premium reduction: The earned dividends can also be used to reduce the annual premiums. The reduction in premiums helps you save on the out-of-pocket costs
- Cash withdrawals: You can also withdraw the dividends as cash. This feature is good if you want immediate liquidity, but not for long-term cash value growth
- Earn interest: The other option, apart from withdrawal, is to let the dividends accumulate in your policy. These accumulated dividends help you earn interest over a period of time
Key considerations with paid-up additions in whole life insurance
While paid up insurance is highly beneficial, there are certain things that you should keep in mind. Since dividend accumulation takes time, a PUA strategy is not for those looking for immediate liquid cash. It is ideal for individuals looking at long-term growth.
Some of the other things to keep in mind are:
- Dividends are not guaranteed, and PUAs depend on the dividend scale to grow. So, depending on it, PUAs may increase or decrease
- In case the dividends are reduced, fewer PUAs will be available, slowing the overall growth of the policy
- While PUA increases the cash value and death benefit, it might also exceed the ACB and bring tax consequences
Are paid-up additions the right choice for you?
Yes, paid-up additions can be a great choice for you, depending on your financial goals and how you plan on using your whole life policy in the future. There are some cases in which this cannot be a good choice, especially when:
- You have a tight budget and want to take dividends in cash
- You want immediate income over long-term coverage and cash value
- You are a low-risk investor
- You are a senior (60+ years of age)
Consult our licensed insurance experts who can help you decide if paid-up additions are the right choice for you. We will help you choose the right strategy and ensure it fits into your financial and estate planning goals. Schedule a consultation with our advisors now!
Frequently asked questions
What does paid up additional insurance mean?
Paid-up additional (PUA) insurance is a dividend strategy in participating whole life policies that allows you to use dividends to buy extra coverage. These additions require no future premiums, immediately increase your death benefit, and build additional cash value that also earns dividends over time.
What happens after a paid-up whole life policy is paid-up?
Once a whole life insurance policy becomes paid-up, it means no more premiums are required, yet the policy continues to stay in force for life. The coverage remains active, the death benefit is guaranteed, and the policy’s cash value can keep growing. Even the death benefit will grow when the policy has dividends attached to it.
Can I cash out paid-up additions?
Yes, you can cash out paid-up additions (PUAs) in a whole life insurance policy. Because PUAs have their own cash value, you can withdraw or borrow against them just like you would with the main policy’s cash value. The cash value in PUAs grows tax-deferred, so when you withdraw it, there can be tax consequences if it exceeds the ACB limits.
Can you add additional coverage to a whole life policy?
Yes, you can add additional coverage to a whole life policy using the dividends. This extra coverage through paid-up additions does not result in increasing the premiums. There will be no medical check-up required if you use the dividends to buy extra coverage. A medical check can be required if you decide to get larger coverage that exceeds the policy limits.
Are paid-up additions (PUAs) taxable?
No, paid-up additions are not taxable until they are withdrawn and the limit exceeds the adjusted cost base or ACB. There are other events when it is taxable, including policy loans, surrenders, or assignments, all of this is dependant on how the policy is structured and withdrawal limits.
Paid‑up additions (PUAs) in participating whole life policies can increase coverage without additional out‑of‑pocket premiums because dividends purchase the extra insurance. PUAs can enhance total policy value and increase available policy loan amounts. They are an ideal dividend strategy for those looking at long-term growth out of their participating whole life policies.
