What is a PUA?
PUA stands for Paid-Up Addition, which is actually a tiny Whole Life policy that is completely paid up with one single premium payment.
What’s nice is that a Whole Life policy that is contractually paid up with a single premium doesn’t have any ongoing mortality charges dragging on your growth, and is the most efficient form of Whole Life from a cash value growth standpoint.
However, a Paid-Up Addition cannot be a stand-alone policy. It can only be added to an existing policy, hence the word “addition.”
You are probably aware that if you try and pay up a stand-alone Whole Life policy with one large single premium, you will violate IRS premium thresholds your policy becomes classified a Modified Endowment Contract (MEC). Your underlying policy would still function the exact same way, except that some of the key tax advantages afforded to permanent life insurance will be revoked by IRS. For instance, with a MEC you would be taxed on all your growth as soon as you made a withdrawal or loan, unlike with non-MEC life insurance where these distributions would be tax-exempt.
I’m pretty sure you don’t want to do that, but…
You can, in most cases, purchase a PUA with a single premium and stay within the IRS premium limits because a Paid-Up Addition is attached to a larger policy. People often ask exactly what these limits are, but unfortunately there is no linear answer. It will depend on the age, gender, and health rating of the insured.
Click here if you would like to schedule a time for our team to test this IRS premium limit for you in real time on a call together so you can determine the optimal funding structure for minimum mortality charges and maximum growth.
The Guaranteed Growth of a PUA
Since a PUA is just like a mini Whole Life policy, only with no further premiums due, let’s take a step back and look at how Whole Life itself works. This excerpt from “Whole Life’s Guaranteed Growth and 4 Ways to Accelerate It” will help you understand the power of a PUA.
You can read the excerpt below or click here to open the full article in a new page.
“At its very core, a Whole Life insurance policy is designed so that the cash value equals the death benefit either when the insured dies or at age 120, whichever comes first…Even though you may not intend to reach age 120, what’s nice is that your Whole Life policy’s cash value climbs on a track toward your death benefit each and every year on a guaranteed basis…Be very clear that this is the core growth engine of a whole life policy…It is unfettered by prevailing interest rates, economic downturns, the company’s actual mortality experience, and so on.”
See how the guaranteed cash value steadily converges on the $1M death benefit even after the contractual premium payment period ends after age 65. The CV=DB at age 120 or sooner if he dies.
The graphic above (also from the “Guaranteed Growth” article) depicts a $1,000,000 policy written on a 38-year-old with a guaranteed level $13,840 annual premium set to be paid for 28 years so that the policy becomes contractually paid up by age 65.
Keep in mind though that rather than paying premiums periodically over 28 years like the image above, a PUA is fully paid up with essentially one single present-value payment. This accelerated premium payment means you have more money working for you earning Whole Life’s guaranteed interest crediting. Because of this, a PUA’s guaranteed growth curve is even more efficient than what is depicted in the graphic. You get the basic idea though.
PUAs Give You a Bigger Share of any Future Dividend Pools
Exactly how dividends are credited varies from company to company. Regardless, your cut of the dividend pool often depends on both the amount of your cash value and the amount of your permanent death benefit. Whether you purchase a PUA by making extra premium payments or by using your policy dividends to buy them, either way these Paid-Up Additions increase both your policy’s cash value and the permanent death benefit.
Therefore, these PUAs will increase your share of any future dividend pools declared by your insurance company. If you use those additional dividends to purchase even more PUAs, you obviously continue to increase policy values, which increases your share of the next declared dividend pool, and so on.
You can imagine how this cycle can create an exponential compounding effect, especially when you maximize your PUA payments.
PUAs Raise the Bar of Growth Through Death Benefit
Remember how your cash value must equal your death benefit by age 120, and how this contractual constant sets the course for your guaranteed growth trajectory?
Since each PUA purchases Paid-Up Additional death benefit, these little paid-up policies keep stacking upon each other, which essentially raises the target that the guaranteed growth must reach. You are layering a foundation with present value cash that must continually crawl toward a significantly higher bar that it must reach in the future.
(This image below is not to scale but roughly represents how stacking PUAs on top of a Whole Life policy increases the death benefit and the trajectory of the cash value.)
Click here to learn how to structure a policy to allow for maximum PUAs.
Accumulate PUAs as Early as You Can
As you get older, the same PUA premium buys you less Paid-Up Additional death benefit.
Looking at it another way, to buy the same amount of Paid-Up Additional death benefit, you must pay a higher single premium each year as you get older to acquire the same amount of death benefit. Since that single premium has less time to reach its eventual death benefit destination by age 120, you must essentially front-load it with more dollars.
So the younger you can start a policy designed to allow for maximum PUAs, the more Paid-Up Additional death benefit you buy, which as you learned:
- Increases your guaranteed growth
- Increases your cut of future dividend pools
This is also why most people elect to purchase PUAs with their dividends as long as they possibly can. Eventually as you get towards retirement age, it may make sense to have your dividends paid out to you in cash. But in order to create plump dividends in retirement, you will want to have the dividends that you are entitled to during your younger years roll back into your policy to purchase PUAs.
Using Term Riders to Maximize Allowable PUAs
- Remember the IRS mandates certain premium limits per the amount of total death benefit you have?
- Remember that if you don’t have enough total death benefit they can revoke some key tax benefits?
- Remember that ideally you want to minimize ongoing mortality charges and maximize PUA payments?
Blending a Term Insurance Rider onto your base Whole Life policy is a way to maintain all the proper ratios while allowing you to stuff a disproportionate amount of PUA premium into your policy earlier than you would normally be allowed to. You’re basically accelerating early growth that will continue compounding into the future.
Just to be clear, this term rider on its own does nothing to enhance wealth building inside a Whole Life policy. In fact, it will even add some additional mortality charges. However, it is often a very nominal amount considering the amount of temporary death benefit it props up, which gives you loads of PUA capacity that you otherwise wouldn’t have with a basic Whole Life policy.
Keep in mind that the image is not necessarily drawn to scale given your age and health rating, but you should definitely find out what a policy designed with maximum PUA capacity could look like for you.
Many agents are reluctant to show it because doing so drastically reduces commissions. The Banking Truths Team has no qualms about that whatsoever since we make it up in volume. Our independent agents are adept at designing policies from the top companies in this fashion.
Click here to have us get started designing a policy designed to hold maximum PUAs for you. Simply input your age, estimated health rating, as well as your desired time to connect via screen-sharing to explore some optimal policy designs for you.
John “Hutch” Hutchinson
(Click here for Hutch’s bio or click the different Acronyms above to see what each of them mean.)