Paid-Up Life Insurance – The INs and OUTs

“Paid-up” life insurance or “limited-pay” life insurance is permanent coverage (to age 100) that has a specified premium schedule.  The premium schedule is normally shorter than the coverage period, and the insurance becomes “paid-up” at the end of the schedule.  This means that the coverage continues and no further premiums are required.  In essence the client will pay more than the actual cost of insurance in order to build a value in the policy which will sustain into the future (until there is a claim).

This type of insurance is suited for people you want permanent coverage but do not want the uncertainty of increasing insurance costs into the future, and who would like to limit expenses when income is reduced (i.e. retirement).  Typical payment periods are 10, 15, and 20 years or a “pay-to-age-65” structure or similar.  For example, a pre-retiree may use paid-up insurance because they would like a premium payment period that ends before they retire and want insurance coverage that provides a gift to their children and/or grandchildren, a gift to a preferred charity, or coverage for funeral and estate expenses.

What to Look Out For:

It’s important to understand what the costs are and what the guarantees are in any insurance policy, but even more so for this type of life insurance.  Let’s say that the cash values (the additional premium that is reserved to cover the future costs of insurance) are not guaranteed or do not have a guaranteed rate of return.  If there were adverse market conditions, then this reserve could be impaired and future premiums may be required to top it up, or risk a lapse in the policy.  If the cash values aren’t guaranteed, then it would be important to have the payment period guaranteed.  This is known as “limited-pay”.  This ensures that regardless of market conditions you are only paying premiums for the specified time period – this leaves the risk of market fluctuations to the insurance company.  Some insurance companies offer both of the guarantees, cash values and payment period.

Is There a Catch?

The only catch is the obvious one…you have to pay more now, so won’t have to pay later.  Another consideration is that you will give up the flexibility of having more money in your pocket now.  Some people say that it would be better to only pay what is “necessary” now (i.e. term insurance) and invest the difference.  Then the savings that you have built up can be used to cover future costs – providing a level of “self-insurance”.  This is a valid argument, but depending on the client situation and the time required for managing the “difference”, this may not be worth it or even available.  Also, the “paid-up” insurance route may offer a guaranteed rate of return on invested premium, tax-free growth, and a tax free insurance benefit to the beneficiaries which by-passes probate.  Recently a few clients of mine requested the paid-up insurance option and it was interesting to note that the guaranteed rate of return in the policy was nearly 6.5%.  In any other investment with a guaranteed rate of return 6.5% may not be available and if it’s derived from interest, then it’s fully taxable.  It’s not taxable in the insurance policy.

The cash value can also be withdrawn throughout the policy duration in full or in part.  This may impair the policy and cause it to lapse if care isn’t taken to ensure that there is adequate value to sustain the policy.  Also be aware of surrender costs which may be a factor in the initial years of the policy.

The Bottom Line:

Paid-up insurance can offer a lot of value to some Canadians, but it is a very long term plan so don’t buy it without checking out all the angles.  If you’re uncertain if it’s right for you, then go with term insurance…you can always convert that to a paid-up plan in the future.

If you have any questions please feel free to contact me using the info below.

By Jonathan at


*This article is for information purposes only and is not intended as specific advice for any individual.  Please review your policy contract for complete details of your existing coverage and speak with a licensed professional if you have any questions or concerns.