Whole life insurance policies have a cash value. As you pay into your policy over time, it builds equity. When a person wants to discontinue paying premiums on the policy without losing its death benefit, he can use the cash value of the policy to pay up the insurance to the maximum cash value. This is referred to as reduced paid up insurance.
A reduced paid up policy is known as a non-forfeiture option. This can be useful in certain scenarios. If you hit a rough patch financially and you cannot afford to pay your premium, the company can pay them by using a portion of the cash value of your policy.
If you don't want to pay premiums ever again, you can use the complete cash value of the policy to purchase the policy in full. However, your policy's value will decrease to its current cash value. Your policy should continue to earn interest and you might continue getting dividends.
When you settle your policy under the paid up reduced policy option, you might lose any riders, such as an accidental death benefit. Also, this approach might only benefit you if you've paid into the policy long enough to build up sufficient cash value while sustaining adequate coverage. Some companies will generate a chart each year the tells you how much your policy is worth if you decide to pay up for a reduced policy with no premiums. This only applies to whole life policies. Term life policies, or policies with a specific end date, do not carry cash value.
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