When you pay premiums, particularly Paid up Additions Rider premium, you have all policy contract provisions at your disposal to navigate your path to and through financial freedom.
Two in particular:
- Current year PUA Rider payment flexibility
Can you pay the PUA premiums differently than the base premium?
Most likely. Ex: You draft monthly base premium and pay PUA 1x each policy year
Can you pay PUA premiums in lump sums?
Most likely. Ex: You draft monthly base premium or pay base premium annually and make PUA premiums 1, 2, 3 times during the year.
- Past year PUA – Catch Up Provision
Can you not pay PUA premium one year, fully pay PUA premium in future years and then pay the premium you missed?
Most likely. Ex: Your PUA premium is 20k per year.
Year 1 – pay 20k
Year 2 – pay 10k
Year 3 – pay 20k and pay additional 10k to “catch up” what you missed year 2.
How do you know what your policy will allow you to do?
Reference your policy illustration and contract. In the policy are all provisions. Under the PUA Rider sections, all provisions are spelled out. Some things to look for:
-Minimum required yearly PUA premium
-Catch up provision specifications
-How many years you can not pay PUA without losing the ability to continue to contribute
Each insurance company and each specific PUA rider has different provisions. In your system of IBC policies, understanding the similarities and unique provisions will allow you to use your system to maximum benefit.
Using Policy Provisions to Your Benefit
Strategies:
- Protect your ability to pay premiums
A Paid Up Additions rider is primarily used to create cash value early in an insurance policy. However, for most insurance companies, it is also a way to preserve your ability to pay large premiums. Just like a permanent insurance policy creates guaranteed life insurance for you even if you become uninsurable, a PUA rider creates a guaranteed place to pay premium. As soon as you create an insurance policy as the vehicle to operate the Infinite Banking Concept, you have created a guaranteed place to store cash. This even extends to your ability to catch up PUA premiums you did not pay in previous years, regardless of your ability to qualify for new coverage at that time. The only limitation therefore is how much premium you can pay. This is set at the time you created the policy. Here’s the question: at what level do you want to lock in your ability to pay premium? - Change how you pay premiums as life changes
Think about 2020. How much uncertainty was there in the marketplace? Having the flexibility to pay premiums differently than the annual or monthly mode became paramount for some to navigate the year. Side note – how much more important was it to have access to cash value to pay premiums, take over some debts to free up cash flow, and for some, inject cash into opportunities the year created to move closer to financial freedom? The Paid Up Additions rider creates flexibility in how you get cash into the policy and being able to change year after year helps to make the most efficient use for cash. Here’s on common scenario – drafting monthly premium, but collecting and holding cash in the bank. Solution – pay PUA rider in full for the year and potentially even pay the base in full as well. - Exercise Catch up Provisions
Would it be better to pay PUA premiums and consistently take policy loans to pay for living expenses or pay the minimum PUA premium and use cash to pay for living expenses? This is the only scenario I can think of where intentionally not paying premium in full comes into play- when you only have enough cash flow to pay monthly expenses. The answer is dependent on what you realistically think future cash flows will be. The most common scenario where the catch up provision comes in play is if someone forgets how they starting using the policy and then view the policy as one of their other investments or as just another one of their monthly expenses. In this scenario the ability to go back and catch up premiums becomes a huge opportunity as they use cash moving forward and need a place to not only spend cash, but leverage cash value through policy loans and make cash flow repayments.
Wrap Up
The catch up provision for PUA premiums is a comforting piece afforded to most insurance policies. You lock in your insurability to pay premiums that you may have not paid, create flexibility in how you pay premiums in the current year, and also give yourself the flexibility to catch up what you missed.