What Are Paid Up Additions & How Do They Work?

Think of how a tree grows. Each year, a new layer is added to the outside of each growing season. We refer to this as the rings of the tree. Each ring represents a year of uninterrupted growth. This same principle happens with the whole life policy. The policy owner's behavior has created a permanent advantage. When you think about our current system, it just works against us and it works for them. What we're saying with this is let's create something that works by design for us.

Hey, welcome back to Wealth on Main Street. Richard Canfield here. I'm excited to introduce Mike Smella, who's going to be walking through some incredible takeaways, incredible observations, as he goes through chapter by chapter with a great review of his observations from Cash Follows the Leader. We love this book. It's a really great book. It's a short read. It's got some fun little images in there, and you're going to hear all about it from the perspective of Mike with with his experience both in life and with the Infinite Banking Concept. So with that in mind, let's take it away.

Hi, it's Mike again. Cash Follows the Leader. We are in chapter 2 on page number 32. Last chapter, or last part of the chapter, we talked about the base policy. Now we're going to talk about creating what are called paid-up additions. We're going to be adding floor, adding floors to the base foundation of your house. Okay, so starting on page 32, adding floors to the financial house with paid-up additions. Just as the foundation supports your home and bears the weight, the same applies to your base policy. In this segment, we'll add floors to your financial house that will stack up on top of the foundation. We'll refer to each floor as a paid-up addition, or simply as a PUA. What are they and how do they work? Paid-up addition is an add-on to your base policy that is stacked on top of each other, just like the floors of your home. There are two ways to buy paid-up additions: one, with premium payments, and two, using your annual dividends. When your policy is designed, you'll recall a portion of the total premium is flexible or optional. So remember, the base premium is, is basically the amount that we need to put in each month to keep the doors of our banking system open. Then we structure it to have a flexible amount anywhere from basically $10 to whatever you want. Okay. That are the optional paid-up additions that you could put in on a monthly basis. You could put in a quarterly basis. You can put it in whenever you want. You've got the flexibility, but those become the additional floors on top of your foundation. Okay, so if you're paying a premium, the optional portion, when paid, immediately buys a paid-up addition. If you're paying a monthly premium, a paid-up addition is also purchased monthly. If you pay your premium annually, a paid-up addition is also purchased annually. In most cases, the policy owner can contribute this optional premium on a flexible or ad hoc basis during the policy year up to a predetermined maximum amount. As I was just saying, you can put some in, you can— it, it's flexible, it's up to you. Okay, because you are the policy owner, you decide what happens with your dividends. You can and should elect paid-up additions as your dividend election, something we build in with every policy when we're putting it together. Each year that a, that a dividend is declared, it will be used to purchase even more paid-up additions. And each paid-up addition also receives a dividend every year that dividends are declared in the future. The compounding effect that you create inside your policy can become enormous. So think about this. You've got your base. And that every year when the insurance company is profitable, they declare a dividend. Well, the insurance companies we work with have been profitable every single year of their existence for over 150 years, every year. So they pay dividends on that base amount. Then when you create or put in additional amount for your paid-up additions, that dividends are paid on that too. You put on some more, you add another floor, you add another floor, it keeps building an even more deeper, deeper foundation. The dividends and the contractual growth create this compounding effect. Remember the name of the book, Cash Follows the Leader. The cash value is always growing towards the death benefit. So the more— I don't like a skyscraper— the more floors we put on, the faster it's going to grow and the higher it's going to grow. By contract, by design. That's pretty cool. What does each paid-up policy or paid-up addition premium buy? More participating whole life death benefit, which must also accumulate its equivalent in cash value. The PUA is a single premium whole life insurance policy, or whole life policy added on top of the existing foundation of the base policy. For example, if you have a foundation and a starting base policy death benefit of $500,000, you purchase a paid-up addition of $50,000 in addition death benefits, creating a, a, a new total death benefit. The total death benefit is now $550,000. Now, because the total cash value is guaranteed to match the total death benefit, the daily growth accelerates because the life insured is aging closer to 100. With each new floor added, the rate of cash value growth must speed up to chase after it. It becomes more efficient Every single thing. Once acquired, this increase in total death benefit is locked in. It is appropriately named paid-up because it's paid for and essentially becomes an increase to the guarantee of the contract. This means the policy owner's behavior— this is huge— the policy owner's behavior of purchasing paid-up additions has created a permanent advantage. It's not what the life insurance company does, it's what we do, our behavior as policy owners that create the advantage, not only for us, but for every future generation in our life, in our families down the road. Huge, huge.

Okay, Mike's walking us through Cash Follows the Leader. It's a great book, but it's only good if you've got one. So go ahead and get a copy. It's free. Head over to CashFollows.com. That's CashFollows.com and get one dropped right into your inbox.

Let's expand. Kim and Jack are a married couple. They decide to insure Jack, age 35, as a primary income earner. They purchase a dividend-paying participating whole life policy with a starting death benefit that has merit, meaning it's needed. They want to have the option of depositing a maximum of $15,000 each year option, okay, but only be contractually obligated to deposit a minimum of $5,000 each year. The total amount is both comfortable and affordable for them. So their foundation is $5,000 a year that they, that they need to put in to keep the doors open. The addition flexibility they have is to put an additional $10,000 or up to $15,000 total into their policy in the form of premiums each year. Each year that they put in more than their required amount of $5,000 is building that higher and higher. It's building it deeper and deeper. The value of their insurance will grow, will go up. And the value of their cash value will go up to meet it eventually, to meet it. Okay, the amount that you choose will obviously be different from Kim and Jack's, as your situation and needs will be different. However, we always recommend that your policy with paid-up additions satisfies the same criteria of comfort and affordability. That's key. This is all about you. Okay, so back to our example. The base policy requires a minimum of premium of $5,000 annually. Him and Jack spend less money than that, than what they earn, and agree they want to contribute their savings as disposable income, $10,000 plus, and simply change where that money resides. Working with the right advisor on our team, the policy was engineered warehouse that additional $10,000. In other words, Kim and Jack now have the contractual authority or control to deposit more than $5,000 to a maximum of $15,000 in any given year, but they are not contractually obligated to deposit anything more than $5,000 giving them desired flexibility. Let that sink in for a bit. It's up to you. You've got the flexibility. You've got the control. Him and Jack's advisor explained the policy is a product where becoming your own banker is the process. Furthermore, they understand that their money must reside somewhere. Him and Jack value the coaching they receive and prioritize depositing a total of $15,000 into their policy as often as possible. The optional— the optional amount of $10,000 immediately purchases a large paid-up addition, a floor that is stacked onto the base policy. And each year they repeat that, the total— each year they repeat that, the total death benefit increases, so the total cash value must follow. Because they co-own the life insurance company, the determination of the dividend amount paid to them each year is based primarily on the contribution principal. Each premium deposit increases their policy's contribution to the net earnings of the life insurance company, thereby increasing their share of the divisible surplus. Each year dividends are declared They are paid on the base policy and every paid-up addition. This powerful compounding effect is created by Kim and Jack. So they create daily compounding by their— them as the policy owner, their behavior. And the more that they put in, the more that they add to the contribution of the profitability of the insurance company, which it just keeps adding on bigger and bigger and bigger. I hope you're getting this because it really is, it's quite exciting. It's quite basic. And it's never really been taught to us because I guess in my humble opinion, if the banks and the powers that be wanted us to know about things like this, who would we not need? Well, we wouldn't need them. And does that do any good for them? No. So when you think about our current system, it's not that our current system is broken. It works exceptionally well. It just works against us and it works for them. What we're saying with this is let's create something that works by design for us. Page 35. This reminds us of something Nelson Nash often said: the policy owner's behavior is far more critical than the behavior of the life insurance company. Read that again. The policy owner's behavior is far more critical than the behavior of the life insurance company. Then let's recap what we've discussed on paid-up additions. They are basically single premium paid-up whole life policies that are stacked on top of one another. They create an immediate increase in total cash value and total death benefit. Death follows the leader. Death benefit increases, what happens to the cash value? It follows the leader. Creates an unstoppable accumulation of new cash values equal the newly increased paid-up death benefit, and it increases all future cumulative dividends. By acquiring paid-up additions, Tim and Jack create a ripple effect with their money. For example, think of how a tree grows each year. A new layer is added to the outside of each growing season. We refer to this as the rings of the tree. Each ring represents a year of uninterrupted growth. This same principle happens with the whole life policy. With the power of paid-up additions every year, the circumference of that policy increases and each annual dividend is paid on an ever-increasing circumference. And for each subsequent year, the dividends will build on the years before, and so on. This impact is based on their decision to exercise their contractual authority and purchase the paid-up additions. In other words, Kim and Jack's behavior is more impactful than the behavior of the life insurance company they co-own. I think I'm going to stop it right there. We're going to start again on page 36 and continue on. Thank you. Have a great day.

That was pretty awesome. I think we should check out what the next chapter has to hold, and you can find that out right here.