What Is Reduced Paid-Up Insurance?

Reduced Paid-Up Insurance Explained

Definition
Reduced paid-up insurance is an option whole life policy owners might have to use a policy's cash value to make a single, in-full premium payment. Then, they can stop paying premiums.
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Reduced paid-up insurance is an option whole life policy owners might have to use a policy's cash value to make a single, in-full premium payment. Then, they can stop paying premiums.

While not making payments can save money, there are other factors to consider with using reduced paid-up insurance. Let’s learn more about what this insurance is, how it works, and some pros and cons to keep in mind. 

Definition and Examples of Reduced Paid-Up Insurance

Reduced paid-up insurance is one of the payout options found in a life insurance nonforfeiture clause. It's when you take your whole life insurance policy's accumulated cash value and use it to buy a new life insurance policy with a smaller face value.

Note

If your policy has a non-forfeiture clause, you may options to get full or partial benefits if you want to cancel your plan or if your policy lapses. Reduced paid-up insurance is one. The other two include a cash surrender or extended term insurance. 

You’ll need to pick the one that works best for you. Your insurance agent can tell you how much insurance you can buy for your cash value.

Since you purchase a new policy with a single premium payment, you no longer have to make payments on your old policy, and your coverage is guaranteed for life. This can save you money each month.

However, because your new policy has a smaller face value, your beneficiary receives less money when you pass away. The amount of insurance you’re able to purchase with your reduced paid-up option depends on two factors: 

  • Your current age
  • The original policy’s cash surrender value

No matter the adjusted face value, the reduced paid-up insurance policy you purchase has the same terms and conditions as your old one. As a whole life policy, it also continues to accumulate a cash value throughout your life as it earns interest or dividends are paid. 

Note

You can later borrow or withdraw the policy’s cash value according to its terms, but if you don't return the withdrawal or pay off the loan, the benefit your beneficiaries receive may be reduced or the policy could lapse.

How Reduced Paid-Up Insurance Works 

Let’s say you have a whole life permanent life insurance policy in place. You've been making payments for years. Then, when you retire and create a new budget, you decide you no longer want to continue to make regular premium payments. (You can typically choose to surrender your policy or use a non-forfeiture option for any reason, though there may be charges or restrictions.)  

Note

If your policy has a non-forfeiture clause included, this means that instead of canceling your policy and giving up your cash value, you have other options.

After reviewing the three types of payouts, you decide that the reduced paid-up insurance option would best meet your needs.  Your insurance agent reviews your policy details to see what your current face value is and how much cash value you've accumulated over the years. They determine that your accumulated cash value is $13,005.

This cash value, they determine also after factoring in your age, can buy you a reduced paid-up policy with a death benefit of $30,990. You think that benefit fits your needs, so you fill out the paperwork to request the change.

This policy would continue to build up cash value as it earns interest. And since it’s paid in full, you’d no longer have to make premium payments. When you pass away, your beneficiary would receive the face value. 

Note

To make changes to your life insurance policy, you may need to have your form signed by a witness and then notarized. Ask your agent for details about the process. 

Pros and Cons of Reduced Paid-Up Insurance 

Pros
  • No monthly payment

  • Beneficiaries still receive a death benefit 

  • Policy continues to build cash value

Cons
  • Riders drop off of policy 

  • May have time restrictions in place to avoid fees

  • Beneficiary receives less when you die

Pros Explained

  • No monthly payment: You’re using your cash value to buy a policy with a lump-sum payment. You won’t have monthly premiums to pay. 
  • Beneficiaries still receive a death benefit: The benefit may be reduced, but you can still have peace of mind that loved ones will get some money when you die. 
  • Policy continues to build cash value: Once you’ve purchased the replacement policy, it works exactly like your original policy. It can build cash value with interest. You can use that cash value for other financial reasons, like taking out a loan. 

Cons Explained

  • Riders drop off of policy: Once you take a nonforfeiture option, all riders drop off your policy, including accidental death. 
  • May have time limitations in place to avoid fees: Some life insurance policies have a surrender charge period in place. If you give up your policy before then, you’d have to pay a fee. Others may have rules in place that prevent you from making this type of change for a few years. Check your policy for any restrictions. 
  • Beneficiary receives less when you die: You’re buying a policy with a smaller face value. This means your beneficiary isn’t going to get as large as a death benefit when you die.

Key Takeaways

  • Reduced paid-up insurance is only available for permanent life insurance. It is not an option with term life policies because they have no cash value.
  • With reduced paid-up insurance, you use the built-up cash value of your policy to purchase a smaller life insurance policy that’s similar to the one you’re surrendering. 
  • Once you have applied cash value to pay a premium in full in a single payment, you won’t have to pay regular premiums. 
  • Your beneficiaries get a death benefit when you pass away with reduced paid-up insurance, the death benefit is lower than the benefit of your original policy.

Correction - Feb. 28, 2022: This article has been updated to correct how the death benefit may be impacted by a policy withdrawal or loan and how the amount of paid-up insurance available is determined.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. State Mutual Insurance Company. “Instructions for Requesting Your Policy Be Placed on Reduced Paid-Up Insurance.”

  2. AARP. “5 Things You Didn't Know About Life Insurance.”

  3. Guardian Life.”Life Insurance Death Benefits: What You Need To Know.”

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