Paid-Up Additions: The IBC Secret Sauce
Want to get an insider’s look at an IBC policy? When it comes to how the Infinite Banking Concept works, the magic is (mostly) in the paid-up additions or PUAs.
Let’s go to the IBC lab and talk about PUAs today. What are they, and how do they impact your whole life insurance policy?
So if you want to understand just how valuable these three letters are, how they add access, growth, and flexibility to your policy… tune in now!
Table of contents
What are PUAs?
The acronym itself stands for Paid-Up Additions; and they can add a lot of growth, access, and flexibility to your life insurance policy. If you’re interested in setting up a policy for the purpose of creating an infinite banking system, it is essential to understand the importance of PUAs.
As you may be able to guess, PUAs are additional coverage on your life insurance policy that you can buy. In other words, you’re adding additional life insurance coverage that is completely paid up and requires no further premiums. As you add PUAs to your policy, you’re thus incrementally increasing the impact of both your cash value and death benefit.
Nearly any contract has the ability for PUAs, however, the mechanics can vary from policy to policy. The company, for example, also establishes how much additional coverage you can purchase within your contract–as well as when and how you purchase it.
How Do Paid-Up Additions Enhance Your Life Insurance?
Let’s think about this from a real estate perspective for a moment. If you bought a residential property, you’ve bought an asset. Whole life insurance is also an asset—as you pay premiums, you’re building up equity like you would in a home.
Then, let’s say you want to build an addition to this residential property, in order to add value. In this instance, let’s say you add a $10,000 sunroom, and have an appraiser check it out. If the sunroom is well done, your appraiser might tell you that your value went up by $40,000. The same happens when you purchase a paid-up addition. That $10,000 PUA could add around $40,000 to your death benefit, or the total coverage of your insurance policy. Not to mention that an increase in death benefit also positively impacts the efficiency of your cash value build-up.
Here’s where things get really interesting. Upon the appraisal of your residential property, you could then go to the bank and say, “Look, the value of my property has increased. I’ve paid for the addition out of pocket, could you lend me money based on what I spent on the addition?” The bank could then lend you a portion, or the full value, of that $10,000 to create more value. Life insurance works the same way. The $10,000 is your premium for the PUA, and a portion of that is available to you as a loan against your cash value.
In both scenarios, the $10,000 you pay increases the value of your asset by $40,000. This makes it easier for a bank or insurance company to lend to you because they know that even if you default on the loan, there’s additional value there as collateral.
The Difference Between Base Premium and Paid-Up Addition
Base premium is the money you pay to obtain your life insurance coverage to begin with. The base premium that you pay is what largely contributes to your long-term growth, dividends, and death benefit. PUAs, on the other hand, will contribute more heavily to your early cash value accumulation and less to the death benefit.
This is because your base premium is designed to cover the cost of your insurance first, with anything leftover contributing to your cash value. This is because the risk to the life insurance company is greater in the early years. In other words, if you were to die in the first few years of the policy, the life insurance company would pay out your full death benefit regardless of how many premiums you have paid. The older you are, the more premiums you have paid, the more your death benefit has been funded. This also means that as the years pass, more of your base premium will go toward cash value.
The PUAs, on the other hand, buy a much smaller amount of additional life insurance coverage and can contribute more heavily to your cash value. So in the years where less of your premium goes toward cash value, PUAs can improve the cash value that is accessible to you.
Which Earns the Most Dividends
It’s important to understand that most companies pay the highest dividend on the base portion of the policy. The reason is that the base premium that goes into your policy has been committed for long-term growth.
Bring it back to the real estate example. Let’s say that the sunroom you built is 400 square feet, but the property you built upon was already 3,000 square feet. Most of the value of the property is in the original building. The sunroom increases the total value, but alone it doesn’t hold as much weight. Likewise, the insurance company doesn’t give paid-up additions as much weight as the base premium when assigning dividends.
What Are premium splits?
Often, when people refer to building a policy for early high cash value and long-term growth, they reference various PUA splits. This could be 40/60, 30/70, 20/80, 10/90, etc. What this refers to is the ratio of base premium to PUA. And there are often debates in the infinite banking world about which is best.
We’d like to preface the discussion by saying that there truly is no right or wrong answer here. The best way to know the right split for you is to talk with your financial advisor. The truth of the matter is that it will depend on your income and financial situation, as well as what life insurance company you choose. It’s also important to take your goals into account! You may want to build a portfolio of policies and desire different policies to serve different functions. You can read more about building a portfolio of policies in our Infinite Banking 201 series.
If you’re looking for early cash value, for example, you might want a bigger portion of PUA. On the other hand, if you’re more interested in long-term growth and dividends, you may desire a greater potion of base premium. As you look at your initial illustrations, remember that they only represent a snapshot in time. Dividend rates will change and are likely to go up as the Federal interest rate rises. Therefore, it’s often not prudent to base your split on an initial illustration alone.
Can You Start a Policy Today and Add PUAs Later?
The short answer is, yes! However, you must create that ability when you design your policy. In other words, even if you don’t intend on buying paid-up additions in the beginning of your policy, you must include them in your policy design when you create the policy. Working with an IBC practitioner will be extremely helpful in this scenario because they can help you determine the ideal split.
PUAs are available to policyholders if you purchase a rider on your policy that allows you to be able to purchase a certain amount of PUA annually. If you don’t have that rider on your policy, you won’t have a provision that allows you to purchase PUAs.
In addition, PUAs run on a schedule. When you have a PUA rider in place and you determine your premium and PUA split, that split identifies how much PUA you can purchase each year. Some insurance companies allow you to catch up on PUAs. For example, if your family hits hardship one year, you don’t have to buy any PUA that year. Your insurance company may allow you to purchase all or a portion of the PUAs you missed, in addition to your current year’s PUA. However, there’s often a time limit for catching up.
An IBC practitioner can help you determine whether a PUA rider will help you, and how big your split should be. They can also help you strategize a portfolio of policies.
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