A Premium Deposit Account (also called a premium deposit fund) was designed for life insurance applicants who want to deposit a lump sum of money in a life insurance policy. Instead of going directly into the policy, the money is deposited into a side fund that earns interest. The premiums for the policy are paid out of the premium deposit account over a 3 to 10-year period. This eliminates the possibility that the insurance policy could become a modified endowment contract (MEC).
Since the PDA is a transaction between the applicant and the insurer, the premium payment is discounted by the amount of interest earned on the deposit and, therefore, saves the policyholder thousands of dollars in premium payments. The PDA insurance is a solid solution for consumers wishing to purchase Indexed Universal Life Insurance with one lump-sum payment.
What are the Benefits of a Premium Deposit Account?
There are several benefits to using a PDA to fund an IUL policy:
- The insurance company will pay a competitive interest rate on the funds that are on deposit, which allows the policyholder to earn interest in the insurance policy and interest on the premium dollars before they are even paid into the policy.
- Premium payments are automatically taken from the PDA and paid into the policy, so the policyholder doesn’t have to worry about making payments year after year.
- Spreading your premium payments out using the PDA eliminates the possibility of your insurance contract being designated as a modified endowment contract, which would result in substantial tax liability when you take money from the policy.
How Does the Premium Deposit Account Work?
Instead of depositing a lump sum directly into your insurance policy, the applicant would deposit the lump sum into the premium deposit account. The first annual premium is withdrawn immediately to fund the insurance policy for the first year, but the remaining money will remain in the PDA and earn interest. Each subsequent year, the annual premium is reduced by the interest earned on the funds in the PDA.
Here is an example of how PDA insurance will reduce annual premium payments over 10 years for a 55-year-old male who is very healthy and does not use tobacco. The policy is set up as a 10-pay, and premiums are $11,499.38. The amount deposited into the PDA is $100,000.
| Payment Year | PDA Debit Amount | Interest Paid | Annual Premium |
|---|---|---|---|
| 1 | $11,499.38 | 0 | $11,499.38 |
| 2 | $11,137.41 | $361.97 | $11,499.38 |
| 3 | $10,786.84 | $712.54 | $11,499.38 |
| 4 | $10,447.30 | $1,052.08 | $11,499.38 |
| 5 | $10,118.45 | $1,380.93 | $11,499.38 |
| 6 | $9,799.95 | $1,699.43 | $11,499.38 |
| 7 | $9,491.48 | $2,007.90 | $11,499.38 |
| 8 | $9,192.72 | $2,306.66 | $11,499.38 |
| 9 | $8,903.36 | $2,596.02 | $11,499.38 |
| 10 | $8,623.11 | $2,876.27 | $11,499.38 |
| Totals | $100,000.00 | $14,993.80 | $114,993.80 |
As you can see from the above chart, by placing the lump-sum premium into a premium deposit account rather than paying the $100,000 directly into the policy, the policyholder added an extra $14,993.80 in premium payments over ten years. This allows for increased cash value growth and never puts the policy in jeopardy of being designated a modified endowment contract.
Are All Premium Deposit Accounts the Same?
The life insurance industry is competitive, and as such, insurance companies compete across the board concerning insurance rates, interest rates, and many aspects of their premium deposit accounts. Certainly, this competition will benefit consumers, so it is important to inquire about and discuss the details and considerations of your premium deposit account. We recommend that you ask about the following topics:
- Minimum and maximum number of payments required?
- Minimum and maximum deposit amount?
- What is the cost of the PDA, if any?
- Interest rate and schedule
- Is there a penalty for canceling the premium deposit account?
- Who receives the unused funds if death occurs before the account is exhausted?
- Does the account owner and depositor have to be the same?
Companies that offer the best Premium Deposit Account
It certainly makes good financial sense to choose an insurance company that offers the best interest rates for their premium deposit accounts. Still, it is also important to judge a company you are considering on whether they will be the best fit for your insurance needs.
We recommend any of the following carriers for Indexed Universal Life insurance, and they all offer premium deposit accounts for single-premium policies:
Allianz Life Insurance Company Premium Deposit Account
Allianz Life is also one of our go-to carriers for Indexed Universal Life rates. Policyholders currently receive 5.3% interest on funds deposited into the PDA. This is the highest we have seen. Allianz is continually awarded high ratings for its financial stability, which we consider to be one of the most important aspects of the companies we represent.
North American Life Insurance Company Premium Deposit Account
North American Life is an A+ rated carrier by A.M. Best and offers a complete portfolio of life insurance products. The North American Builder Plus IUL product is a great solution for consumers looking to accumulate wealth for tax-free retirement income. Their competitive insurance rates and interest rates on their premium deposit account make them one of our go-to carriers.
Minnesota Life Premium Deposit Account
Minnesota Life, a Securian Company, is another one of our go-to insurance companies when we are shopping for Indexed Universal Life insurance for our prospective clients, and they also offer a competitive interest rate on their premium deposit accounts.
The Bottom Line on Premium Deposit Accounts
Suppose you consider indexed universal life insurance as part of your retirement planning strategy and prefer to pay a significant premium in advance. Why not use a premium deposit account to reduce your insurance cost and ensure your insurance policy has no chance of becoming a modified endowment contract?
Frequently Asked Questions about a Premium Deposit Account
What is a Premium Deposit Account, and how does it work with Indexed Universal Life Insurance?
A Premium Deposit Account (PDA) is a special account used to fund Indexed Universal Life Insurance. Policyholders can deposit a lump sum into the PDA, which funds the policy’s premiums over time. The deposited funds earn interest, reducing the effective cost of insurance premiums.
What are the benefits of using a Premium Deposit Account over traditional premium payment methods?
The benefits include earning competitive interest on deposited funds, automatic premium payments from the PDA, and avoiding the policy being classified as a Modified Endowment Contract, which has tax implications.
Are there any restrictions or limitations associated with Premium Deposit Accounts, such as minimum or maximum deposit amounts?
Yes, PDAs often have specific guidelines regarding minimum and maximum deposit amounts, number of payments, and potential fees or penalties for withdrawals.
How does the interest earned in a Premium Deposit Account affect the overall value and performance of an Indexed Universal Life Insurance policy?
Interest earned in a PDA can effectively reduce the cost of premium payments, which may enhance the policy’s cash value accumulation and overall performance.
