If you no longer want to pay the premiums for your life insurance policy, you might not have to surrender it. Instead, you might be able to choose a non-forfeiture option known as reduced paid-up life insurance. This allows you to maintain a reduced death benefit based on the amount you have already paid without requiring you to continue paying the monthly premiums. Bankrate’s insurance editorial team explains what reduced paid-up life insurance is and how it works to help you decide if it’s the right option for you.

What is reduced paid-up life insurance?

If you own a permanent whole life policy but no longer wish to pay premiums, there are two common methods available to you without forfeiting the policy. The first option is to surrender the policy and receive the cash value. The other option is to use the cash value the policy has accumulated and turn it into reduced paid-up insurance coverage, which keeps your policy active but will lower your death benefit. The death benefit will become equivalent to the cash value when you convert to reduced paid-up insurance.

You would also need to confirm eligibility for the reduced paid-up insurance coverage option since most life insurance companies require the policy to be a certain number of years old. The reduced paid-up option is not available with term life insurance policies since those types of policies do not build any cash value.

How do life insurance companies calculate the reduced value of your policy?

One of the key factors in exercising the reduced paid-up option is understanding how life insurance companies calculate the new, reduced value of your policy. The first step life insurers take is to add up the number of premiums you have paid towards the policy, add the cash value and factor in your age. Once the company has these three factors, it can use them to determine the overall cash value. This newly calculated cash value should be a close match to the reduced paid-up coverage of the policy.

For example, assume you have a policy you have paid $2,500 in premiums each year for 20 years, which has a cash value of $40,000. If you choose the reduced paid-up life insurance option, the guaranteed death benefit would likely be close to the $40,000, and you would no longer be responsible for future premiums.

When is reduced paid-up life insurance a good option?

Choosing to use the reduced paid-up life insurance option may be a good choice for those struggling to make the annual premium payments. If the cost of your whole life policy, for instance, is becoming more of a burden, then it could be best to convert. It’s probably a better move to convert the policy than risk a policy lapse, which could result in policy termination.

It may also be a wise financial move to keep the policy in place if you want to keep the death benefit along with the tax benefits this type of policy may provide. If you’re not sure if reduced paid-up life insurance is right for you, consider speaking with a certified financial planner or licensed life insurance agent.

When is reduced paid-up life insurance not a good option?

Converting to this policy option may not work for every policyholder. If your current whole life policy includes several riders you are dependent on for financial protection, then you should be aware these riders will be canceled upon conversion.

For example, if your whole life policy currently includes a disability rider that would pay out monthly if you were to become disabled, then you would lose this rider when converting to a reduced paid-up policy. You would no longer be able to depend on this income if you were unable to work. Again, speaking with a financial planner or life insurance agent to determine the best move for you could be helpful.

Other nonforfeiture options for life insurance

Other nonforfeiture options for life insurance are available to policyholders besides reduced paid-up life insurance. It is important to review the availability of these options with your life insurance company since not all options are available from each carrier. Nonforfeiture means you are canceling or converting your policy but still receiving some value from it.

  • Cash value surrender. This option is where the life insurance company pays the cash value to the policyholder in one lump sum. Cash value surrender cancels the policy, and it cannot be reinstated. It can take several months for the life insurance company to make the lump sum payment to you if you choose this option. In most cases, companies will take a small portion of this cash value as a surrender fee.
  • Extended term insurance. This option takes the cash value of the policy and uses it to purchase and convert the policy to a term life insurance policy. The new term length would equal the number of years you paid the premiums on the original policy.

What are paid-up additions for life insurance?

Paid-up additions for your whole life policy are supplemental payments you can make to increase the amount of your death benefit. Whereas the reduced paid-up option is included with whole life policies, the paid-up addition is completely supplemental and is only an option if the “paid-up” rider was purchased by the policyholder. Not all providers offer this type of rider, so it’s important to ask when applying for a policy if this option is available.

Frequently asked questions

    • To determine the best life insurance company, it is critical to compare several options to see which one best suits your financial situation and needs. Comparing the financial stability of a company, reading customer reviews, reviewing the life insurance coverage and options and obtaining quotes is an effective method for finding the best life insurance company. Keep in mind that rates for life insurance typically do not vary as much for the same coverage and limits as other types of insurance, but it could still be helpful to collect several quotes and compare to see which company offers the right policy and price for you.
    • It depends on your financial situation. If you can no longer afford the annual premiums and are at risk of policy termination due to nonpayment, then it may be time to consider converting to the reduced paid-up option so you can retain some of the benefits from your policy.
    • Life insurance can provide an important degree of financial protection for many people in different situations. In many ways, the point of life insurance is to help protect against the risk of the unknown—to provide a financial safety net in case the worst should occur. Some of the common reasons people consider life insurance include when their partner or family depends on their income, when there are young children to consider, if there are mortgages to consider or to protect family and business partners from debt. Whatever your reasons for wanting a life insurance policy, you may want to consider speaking with a certified financial planner, who can help you decide what type of life insurance (and how much) is right for you.
    • If you take the reduced paid-up insurance option, then decide later that you no longer need the policy at all, you could surrender the life insurance policy. You’d have no death benefit to leave behind since the policy would terminate. Working with a licensed life insurance agent or certified financial planner could help you decide if this move is right for you.