Reduced paid-up insurance
MR. WATSON: Now, second story, different situation. Still year 10. My wife and I are retired, our house is paid for, our kids are raised. We are a typical retired American couple. We have a pension, maybe some Social Security coming in. We are getting by. We don't want to pay this $2,000 a year in premium anymore. And she doesn't need $100,000 if I die.
MR. WATSON: But she does want me to leave her some kind of death benefit. But our goal is not to pay premiums anymore. So, we can reduce the death benefit down to whatever the existing cash value will buy as a single premium paid-up policy at my attained age, which means the age I am when I choose to do this. That's called reduced paid-up insurance . It is just like taking the cash value $13,005, going to the insurance company and giving them $13,005, and buying as much insurance as they can for me, at my attained age. Does that make sense?
ALL: Uh-hmm.
MR. WATSON: But they are going to reduce the original $100,000 down. How much will that $13,005 cash value buy for a guy my age, age 49? Year 10. Look at the chart. It will buy $30,990 of death benefit. It would be an exact amount. No more premiums because we used the cash value to buy this amount. No matter when I died it would pay my wife $30,990. And, the reduced policy would have cash value. As a matter of fact, it would endow at age 100 -- for how much money? $30,990. Does that make sense? (please study the chart below)
ALL: Yes.
MR. WATSON: So the two options I have so far are:
- Cash it in, no insurance and I get my cash value, or
- Reduce the original death benefit down to whatever the existing cash value will buy
MR. WATSON: Under the reduced paid-up, it will be the exact same kind of policy as the original, with two exceptions - the death benefit has been reduced, and it's paid up. If the original $100,000 policy was a dividend-paying policy, then the reduced paid-up policy will be a dividend-paying policy. In other words, if the original policy was paying dividends, then the paid-up policy I switched to will also pay dividends. Does that make sense?
ALL: Yes.
MR. WATSON: Now, the third option. Ann & I have four kids. We are young. We need as much insurance as we've always needed, but we can't afford the premiums. See? Y'all with me?
MR. WATSON: We turn the whole life policy into a term policy. And we used the cash value to pay it as far into the future as we possibly can. That's called extended term insurance . We turn it into a term policy for the same amount of insurance but for a limited period of time. And it will be an exact period of time. At my attained age, the age I am when I choose this. Maybe it's going to last for 16 years, 362 days. If I die within that time frame, what will she receive?
ALL: $100,000.
MR. WATSON: $100,000 in this example. It's the same amount as the original policy would pay. What happens if I die one day past that? She gets zero. Does that make sense?
ALL: Yes.
